Question

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Problem 10-4A Determining the effects of various liabilities on financial statements LO1,4 Part 1: Okanagan Refrigeration manufactures and markets commercial refrigeration systems for food true and specialized transport trucks. It was disclosed in notes to the company's financial statements that timated warranty costs are accrued at the time products are sold. Assume that in 2017 warranty costs estimated at $315,000 and that the related warranty work was actually paid for during 2018. Required Explain how financial statements are affected due to warranties in 2017 and 2018. Part 2: Assume that Fabfit Enterprises collected $1,950,000 during 2017 for fitness magazines that will be delivered future years. During 2018, Fabfit delivered magazines based on these subscriptions amounting to $1,835,000 Required Explain how financial statements are affected in 2017 and 2018 by these subscriptions.

Answer 1

Part 1

The warranty expense shall be recorded in 2017 even though work was actually paid in 2018 because it is given in question that the warranty costs are accrued at the time product is sold.

So, following journal entry shall be passed in 2017

When in 2018, this liability is actually paid, then the following entry would be passed

Part 2

When the amount is received without any service being performed against it, then such amount is not recorded as revenue, instead, it is recorded in the books as a liability.

When the service is actually performed, then the revenue is recorded with the corresponding reduction in the liability.

Following journal entries shall be recorded in this case -

in 2017 -

Journal Date Accounts Debit Credit 31-Dec-17 Cash $1,950,000 $1,950,000 Unearned Service Revenue (Unearned Service Revenue received)

in 2018 -