Question

Dave's Boats guarantees its boats for three years or 1,500 hours, whichever comes first. Industry experience indicates that Dave's can expect warranty costs will equal 10 percent of sales. Assume in its first year, Dave's Boats had sales totaling $473,000, receiving cash for 55 percent receivable for the remainder. Warranty payments totaled $23,600 during the year. Read the requirements Requirement 1. Record the sales, warranty expense, and warranty payments for Dave's Boats. Ignore cost of goods sold. (Record debits first, then credits. Exclude explanations from any journal entries.) Start by recording the sales. Journal Entry Credit Date Accounts Debit Next, record the warranty expense. Journal Entry Debit Credit Date Accounts Now record the warranty payments. Journal Entry Credit Date Accounts Debit

Answer 1

1.

Journal Entry
Date	Particulars	Debit	Credit
1	Cash	260150		$473000 * 55%
	Notes Receivable	212850		$473000 * 45%
	Sales		473000
	(To record the sales revenue)
2	Warranty Expenses	47300		$473000*10%
	Estimated Warranty Payable		47300
	(To record the warranty expenses)
3	Estimated Warranty Payable	23600
	Cash		23600
	(To record the warranty paid)

2.

Estimated Warranted Payable
Beg. Bal.
Cash Paid	$23600	$47300	Warranty Exp.
		$23700	End. Bal.

At the End of First year,

Estimated Warranty Payable = $23,700

3.

Warranty Expenses = $47,300

Warranty Expenses ($47,300) is greater than Cash Paid for warrnaty ($23,600)

The matching principle states that a company must match revenue with expenses. The warranty expense occurs because the sale took place. The expense is a cost of the sale and therefore should be matched with the revenue generated by that sale.