Question

Pr. 13-157—Warranties. Miley Equipment Company sells computers for $1,500 each and also gives each customer a 2-year warranty that requires the company to perform periodic services and to replace defective parts. During 2014, the company sold 700 computers. Based on past experience, the company has estimated the total 2-year warranty costs as $30 for parts and $60 for labor. (Assume sales all occur at December 31, 2014.) In 2015, Miley incurred actual warranty costs relative to 2014 computer sales of $10,000 for parts and $18,000 for labor. Instructions (a) Under an assurance-type warranty, prepare the entries to reflect the above transactions (accrual method) for 2014 and 2015. (b) The transactions of part (a) create what balance under current liabilities in the 2014 statement of financial position?

Answer 1

Date	Particulars	Debit Amount	Credit Amount
Dec 31, 2014	Cash A/c Dr. To Sales A/c (Sales/Revenue to be recorded for sales of 700 Computers at $1,500 each. 700*1500 = $1,050,000)	$1,050,000	$1,050,000
Dec 31, 2014	Warranty Expense A/c Dr. To Warranty Liabilty A/c (Warranty liability per Computer approximately comes to $30 for parts and $60 for labour. So the total amount of expected liabilty to be recorded is $90*700 = $63,000.)	$63,000	$63,000
Dec 31 , 2014	Profit and Loss A/c Dr. To Warranty Expense A/c (Warranty Expense account will be taken to the profit and loss account. So the closing entry needs to be made.)	$63,000	$63,000
2015	Warranty Liability A/c Dr. To Cash A/c To Inventory A/c (Cash account and inventory account here should be credited as the amount of warranty is to be borne by the company out of the resources available with it. So for the parts changed in the warranty period will reduce the inventory of the company and the amount paid to labour will reduce the cash amount of the company therefore both the assets inventory and cash as reduced will be credited. On the other side it is reducing the warranty liability of the company so the warranty liability account is debtited.)	$28,000	$18,000 $10,000

All the warranty liability will be created in the year 2014 i.e. in the year of sales. Also the remaining amount of warranty liability will be reversed in the year warranty period expires that is 2 year from the year of sales. So the warranty liability will be ended or reversed in the end of year 2016. So no entry for the reversal of warranty liability in the year 2015 will be made.

MILEY EQUIPMENT COMPANY
BALANCE SHEET
AS ON DECEMBER 31 , 2014
Liabilities	Amount	Assets	Amount
Current Laibilites
Warranty Liability	$ 63,000.00