Question

To support herself while attending school, Daun Deloch sold stereo systems to other students. During the first year of operations, Daun purchased the stereo systems for $200,000 and sold them for $310,000 cash. She provided her customers with a one-year warranty against defects in parts and labor. Based on industry standards, she estimated that warranty claims would amount to 3 percent of sales. During the year, she paid $3,420 cash to replace a defective tuner.

Required:
Prepare an income statement and statement of cash flows for Daun's first year of operation. Based on the information given, what is Daun's total warranties liability at the end of the accounting period?

Answer 1

See below

Step-by-step explanation:

•Income statement for Daun's first year of operation

Sales revenue

$310,000

Less;

Cost of goods sold

($200,000)

Gross profit

$110,000

Less:

Warranty expense

($9,300)

Net income

$100,700

• Statement of cash flow for Daun's first year of operation

Collection from customers

$310,000

Less:

Paid to suppliers

($200,000)

Warranty payment

($3,420)

Net Cash flow

$106,580

• Daun's Warranty liability/Expense at the end of the accounting period.

= $310,000 × 3%

= $9,300