Question

Computers Galore Ltd. sells computers, computer accessories, and software. On its computer sales, the company provides a one-month warranty that is included in the cost of the computer. Claims under the warranties vary from replacing defective items to providing customers with refunds if they choose. During 2020, the estimated costs related to the one-month warranties was $39,600, of which $36,500 had been incurred before year end ($29,700 for replacement items and $6,800 in refunds). For an additional charge of $100, Computers Galore also offers extended warranty coverage for two years on its computers. This amount is expected to cover the costs associated with the extended warranties. During 2020, Computers Galore sold 740 two-year warranties. The costs incurred during the year for replacements under these warranties amounted to $32,000. Based on experience, the company estimates that its total warranty costs over the two-year coverage period will be $62,500, which it expects will occur evenly over the warranty period. (a1) Prepare journal entries to record the warranty transactions for 2020. (Enter debit entries first followed by credit entries. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter o for the amounts.) No. Account and explanation Debit Credit 1. Warranty Expense 39600 Warranty Provision 39600 (To record estimated cost related to 1 month warranties.) 2. Warranty Provision - 1 365001 36500 Cash 3600 (To record cost incurred related to 1 month warranties.) 3. Cash 64000 Warranty Provision JU 6000 64000 (To record sale of 2 year extended warranties.) 4. | Warranty Provision

Answer 1

Hi,

so in the 2nd journal entry, which is for claims incurred before year end, the debit is correct of 36,500$ out of which only 6,800$ is in refunds so cash account shall be credited 6,800$ and balance 29,700$ in replacement items should probably be credited to stock account as it is an outflow of goods and not cash.

For the 3rd journal entry, company has sold 740 2 year warranties, so the journal entry shall be cash account debited for 74,000$ and credited to Income from Sales of extended warranties (or a similar ledger as per options available).

For the 4th journal entry, since the company has not made any provision for the 2 year warranties, the expenses incurred under replacements under the 2 year warranties shall be directly booked as expense. Hence entry shall be debit Warranty Expense account and credit stock account as it is an outflow of goods and not cash, for 32,000$.

For the 5th and last transaction, since the company's estimates are for 2 years, the amount shall be divided by 2 and only provision for current year estimate shall be made. Hence the entry shall be warranty expense account debit and warranty provision account credit for 31,250$ (62,500$/2),.

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