Question

Exercise 13-11

Early in 2020, Indigo Equipment Company sold 400 Rollomatics at $6,000 each. During 2020, Indigo spent $20,000 servicing the 2-year assurance warranties that accompany the Rollomatic. All applicable transactions are on a cash basis.

a) Prepare 2020 entries for Indigo. Assume that Indigo estimates the total cost of servicing the warranties in the second year will be $37,000. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.)

b) Prepare 2020 entries for Indigo assuming that the warranties are not an integral part of the sale (a service-type warranty). Assume that of the sales total, $58,000 relates to sales of warranty contracts.Warranty costs incurred in 2020 were $20,000. Estimate revenues to be recognized on a straight-line basis. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually. Round intermediate calculations to 5 decimal places, e.g. 1.54657 answers to 0 decimal places, e.g. 5,125. Record journal entries in the order presented in the problem.)

Answer 1

Answer a.

Date	Accounts title and explanation	Debit	Credit
At sale	Cash	$ 2,400,000
	Sales revenue [400*6000]		$ 2,400,000
During 2020	Warranty expense	$            20,000
	Cash, Supplies, wages payable	$        20,000
Dec 31 2020	Warranty expense [37000-20000]	$ 17000
	Warranty liability		$ 17000

Answer a.

Date	Accounts title and explanation	Debit	Credit
At sale	Cash	$ 2,400,000
	Sales revenue [400*6000]		$ 2,400,000
During 2020	Warranty expense	$            20,000
	Cash, Supplies, wages payable	$        20,000
Dec 31 2020	Warranty expense [37000-20000]	$ 17000
	Warranty liability		$ 17000

Answer b.

Date	Accounts title and explanation	Debit	Credit
At sale	Cash[400*6000]	$ 2,400,000
	Sales revenue		$ 2,342,000
	unearned warranty revenue		$58,000
During 2020	Warranty expense	$            20,000
	Cash, Supplies, wages payable	$        20,000
Dec 31 2020	unearned warranty revenue [58000/2]	$ 29000
	Warranty revenue		$ 29000