Miley Equipment Company sells computers for $1,500 each and also gives each cust
ID: 2497117 • 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 2011, Miley incurred actual warranty costs relative to 2010 computer sales of $10,000 for parts and $18,000 for labor.
Instructions
(a) Under the expense warranty treatment, give the entries to reflect the above transactions (accrual method) for 2010 and 2011.
2010
2011
(b) The transactions of part (a) create what balance under current liabilities in the 2010 balance sheet?
Explanation / Answer
Here tha accrual should take place in the same reporting period in which the related product sales are recorded hence the warranty expenses and liability are created in 2010 itself and actual cost are latter booked against the liability
(a) Under the expense warranty treatment, give the entries to reflect the above transactions (accrual method) for 2010 and 2011.
(b) The transactions of part (a) create what balance under current liabilities in the 2010 balance sheet?
Dec 31-2010 Computers sold ( 1,500 x 700 ) 1050000 Dec 31-2010 2-year warranty costs (30+60) x 700 63000 2011 Actual Warranty Cost ( 10000 + 18000 ) 28000