Miley Equipment Company sells computers for $1,500 each and also gives each cust
ID: 2435908 • 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 2010, 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, 2010.)In 2010, Miley incurred actual warranty costs of $10,000 for parts and $18,000 for labor.
Instructions
(a) Under the expense warranty treatment, give the entries to record
the sale of computers,
the actual warranty costs, and
the accrual of estimated warranty liability at the end of 2010.
Explanation / Answer
Total no of compters sold = 700 Total Sales Rev = 700*$1500 = $1,050,000 Two Year warranty cost : Parts $30*700 = $21,000. SO One Yr cost = 21000/2 = $10,500 Labour $60*700 = $42,000. So One Yr cost = 42000/2 = $21,000 (1) the sale of computers, 31 Dec'10 Cash Dr 1050,000 Sales Cr 1050,000 (2) the actual warranty costs, and 31 Dec'10 Warranty Expense -Parts Dr 21,000 Warranty Expense -Labour Dr 42,000 Estimated Warranty Liability-Parts Cr 21,000 Estimated Warranty Liability-Labour Cr 42,000 31 Dec'10 Estimated Warranty Liability-Parts Dr 10,000 Estimated Warranty Liability-Labour Dr 18,000 Cash Cr 28,000 (3) the accrual of estimated warranty liability at the end of 2010. So, at the end of the year, your balance will be: Prepare T-Account Est Warranty Liability A/C ------------------------------------------------------ Parts 10,000 Parts 21,000 Labour 18000 Labour 42,000 ---------------------------------------------------------------- Ending Parts 11,000 Labour 24,000