Miley Equipment Company sells computers for $1,500 each and also gives each cust
ID: 2421951 • Letter: M
Question
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 900 computers. Based on past experience, the company has estimated the total 2-year warranty costs as $40 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 $12,000 for parts and $18,000 for labor
. a) under the expense warranty approach,give the entries to reflect the above transactions(accrual method)for 2014 and 2015.
b)under the cash-basis method,what are the warranty expense balances for 2014 and 2015?
c)the transactions of part(a)create what balance under current liabilities in the 2014 balance sheet?
Explanation / Answer
a) Under the expense warranty approach,give the entries to reflect the above transactions(accrual method)for 2014 and 2015.
2014 To record warranty expense
Warrany Expenses (Dr.) $90,000
Warrany Liabilities (Cr.) $90,000
(900 computer*$100($40+$60) warranty costs as $40 for parts and $60 for labor)
2015 To reduce his warranty liabilities for actual cost incurred $30000 ($12,000 for parts and $18,000 for labor)
Warrany Liabilities (Dr.) $30,000
To Cash Expenses(Cr.) $30,000
b) Under the cash-basis method the warranty expense balances for 2014 and 2015 are nil. There was not warranty expense actual libility in 2014. In 2015 no laibility will be recorded as warranty costs are charged to expense as they are incurred (when they are paid by the seller).
The cash-basis method must be used when (1) it is not probable that a liability has been incurred or (2) the amount of the liability cannot be reasonably estimated. Under the cash-basis method, warranty costs are charged to expense as they are incurred (when they are paid by the seller). No liability is recorded under the cash-basis method for future costs arising from warranties.
c) The transactions of part(a) create balance of Warrany Liabilities of $90,000 under current liabilities in the 2014 balance sheet.