Question

Trail Runner ​USA, a tire​ manufacturer, guarantees its tires against defects for five years or​ 60,000 miles, whichever comes first. Suppose Trail Runner

USA can expect warranty costs during the​ five-year period to add up to 5 % of sales. Assume that a Trail Runner USA dealer in​ Denver, Colorado, made sales of $474,000 during 2018. Trail Runner USA received cash for 30​% of the sales and took notes receivable for the remainder. Payments to satisfy customer warranty claims totaled $19,000 during 2018. Record the sales, warranty expense, and warranty payments for Trail Runner USA (Record debits first, then credits.) record the sale of the tires.

Answer 1

The sales and warranty transactions of Trail Runner USA would be recorded by debiting Cash and Notes Receivable for the sales, crediting Sales Revenue, then recording Warranty Expense and Warranty Liability for the expected warranty costs, and finally debiting Warranty Liability and crediting Cash for warranty claims paid.

Step-by-step explanation:

To record sales, warranty expense, and warranty payments for Trail Runner USA after making sales of $474,000, you first need to consider the different parts of the transaction. Since 30% of sales were made in cash and the remainder on notes receivable, different entries are necessary for each portion. Additionally, to account for warranty costs that are expected to be 5% of sales, a warranty expense must be recorded.

The accounting entries would look like this:

• Debit Cash $142,200 (30% of $474,000)
• Debit Notes Receivable $331,800 (70% of $474,000)
• Credit Sales Revenue $474,000

When recording the warranty expense based on the 5% expectation of sales:

• Debit Warranty Expense $23,700 (5% of $474,000)
• Credit Warranty Liability $23,700

For the payments made to satisfy warranty claims:

• Debit Warranty Liability $19,000
• Credit Cash $19,000

Keep in mind that these are simplified entries and actual accounting practices may require more detail. For instance, when the warranties are honored, the Warranty Liability will decrease while Cash or another asset account decreases accordingly.