Question

Warranties Polar Company manufactures and sells Ice Machines Polar provides all customers with a two-year warranty guaranteeing to repair, free of charge, any defects reported during this time period. During the year, it sold 100,000 Ice Machines for $295 each. Analysis of past warranty records indicates that 12% of all sales will be returned for repair within the warranty period. Polar expects to incur expenditures of 16 to repair each le Machine. The account Estimated Liability for Warranties had a balance of $120,000 on January 1. Polar incurred $160,000 in actual expenditures during the year. Required: Identify and analyze the effect of the events related to the warranty transactions during the year The effect of recording the sales transaction Activity Accounts Statement(s)

Answer 1

Accounting Equation:
	BALANCE SHEET:						INCOME STATEMENT
Transactions/Activity	ASSETS (Cash + AR)	=	LIABILITIES (Warranty )	+	EQUITY	+	REVENUES	-	EXPENSES	Explanation:
O Balance	120000	=	120000	+		+		-		(opeing warranty liability and equivalent cash)
Sales	29500000	=		+		+	29500000	-		(Revenue booked and Cash / AR raised)
Warranty provision		=	1600000	+		+		-	-1600000	(warranty expense booked and liability raised)
Warranty expanditure	-160000	=	-160000	+		+		-		(actual warranty expenses booked and assets, cash reduced)
Total	29460000	=	1560000	+		+	29500000	-	-1600000
Grand Total	29460000	=	29460000