Question

8) 8) A company sells its product subject to a warranty that covers the cost of parts and labour for repairs during the six months after sale. Warranty costs are estimated to be 4.5% of sales for parts, and 1.5% of sales for labour. During the month of June, the company performed warranty work and used $8,000 worth of parts and paid $4,000 in wages for labour to do the warranty work. Sales for June amounted to $450,000. (1) What account should be debited for the $4,000 in labour? (2) What should be the amount of estimated warranty expense for June? (3) If the Estimated Warranty Liability account had a $10,000 credit balance on May 31, what should be the account balance as of June 30? 9) Buy Best Company sells personal computers for $2,300 each. The price includes a two-year warranty. During 2015, the company sells 600 computers. On the basis of past experience, the warranty costs are estimated to be $150 per computer. The actual warranty costs paid by Buy Best during 2015 were $45,000. Prepare general journal entries to record the estimated warranty expense and the warranty payments during 2015. 10) 10) During November 2017, Sunset Airlines sold out all of its eight flights going from Toronto to Cuba. Two flights depart in December, 2017 and six flights depart in January 2018. Sunset collected $1.960,000 in November 2017 for the flights. Sunset's year end is December 31. Required: What adjusting entry would be needed to recognize revenue for 2017? Date the entry What would be the value of the liability on Sunset's Balance Sheet at December 31, 2017? State if the liability is current or non-current. R 9.pdf -

Answer 1

8.	1.	Accrued warranty liability a/c Warranty expenses are charged to accrued warranty liability a/c and the same is debited by cash with the actual amount incurred for warranty expenses. In this case, the $ 4000 incurred for labor.
	2.	The amount of estimated warranty expense will be 4.5% of sales for sales of parts and 1.5% of sales for labor. = .045 x 450,000 + .015 x 450,000 = 20,250 + 6,750 = $27,000 Thus, the total amount of warranty expenses for the month of June is $27,000
	3.	It is easier to solve the question with the help of an estimated warranty liability ledger a/c. Date Particulars $ Date Particulars $ Cash (wages) 4,000 1/6 Balance b/d 10,000 Inventory 8,000 Warranty expense a/c 27,000 31/6 Balance c/d 25,000 37,000 37,000 Thus, the balance in the estimated warranty liability a/c as of June 30 is $ 25,000.
9.		Journal entries: Particulars Debit ($) Credit ($) a. Warranty expense a/c 90,000 Estimated warranty liability a/c 90,000 b. Estimated warranty liability a/c 45,000 Cash a/c 45,000 The company sells 600 computers in the year 2015. Warranty costs are estimated to be $150 per computer on the basis of past experiences. Thus, estimated warranty liability a/c is created based on this amount. Thus, the amount of warranty liability created = 600 x 150 = $ 90,000. Warranty payment amount, as given, is $45,000.
10.		Adjusting entry: Date Particulars Debit ($) Credit ($) 31 Dec 2017 Deferred revenue a/c 490,000 Revenue a/c 490,000 The company collected total of $ 1,960,000 in November 2017 for its Toronto – Cuba flights which are scheduled for December 2017 and January 2018. The amount collected is for a total of 8 flights. The amount is considered to be incurred uniformly for each flight, i.e., $ 1,960,000 / 8 = $ 245,000 per flight. The amount when collected in November is charged to Deferred Revenue a/c as it is not earned at that moment. Revenue is recognized only once the service has been formed. Two flights depart in December 2017 and the other six in January. The revenue for the two flights that depart in December will be recognized while closing the books for the year on December 31st . The total amount recognized will be $ 245,000 x 2 = $ 490,000. The rest of the amount collected, for the January 2018 flights, will remain in the deferred revenue a/c. Balance in deferred revenue a/c = 1,960,000 – 490,000 = $ 1,470,000 This is the amount that will appear as liability on Sunset’s Balance Sheet as on December 31 2017. This balance in deferred revenue account is a current liability.