Question

On August 1, 2019, Pereira Corporation has sold 1,600 Wiglows to Mendez Company at $450 each. Mendez also purchased a 1-year service-type warranty on all the Wiglows for $12 per unit. In 2019, Pereira incurred warranty costs of $9,200. Costs for 2020 were $7,000. Required: 1. Prepare the journal entries for the preceding transactions. 2. Show how Pereira would report the items on the December 31, 2019, balance sheet.

Answer 1

1. Prepare the journal entries for the preceding transactions.

August 1, 2019, sale of 1,600 Wiglows

Dr Cash 720,000

Cr Sales revenue 720,000

August 1, 2019, sale of 1,600 service type-warranties on Wiglows

Dr Cash 19,200

Cr Deferred warranty revenue 19,200

December 31, 2019, accrued warranty expense

Dr Deferred warranty revenue 9,200

Cr Cash 9,200

December 31, 2019, recognition of warranty expense for 2020

Dr Deferred warranty revenue 7,000

Cr Warranty liability 7,000

December 31, 2019, recognition of warranty revenue

Dr Deferred warranty revenue 3,000

Cr Warranty revenue 3,000

2. Show how Pereira would report the items on the December 31, 2019, balance sheet.

Cash account will increase current assets by $730,000.

We do not know the COGS, so we do not know exactly by how much will inventory decrease.

Warranty liability will increase current liabilities by $7,000.

Warranty revenue will increase retained earnings by $3,000. Since the warranty period expires during 2020, and the costs incurred are estimated to be $7,000, then we can recognize the remaining deferred warranty revenue as earned warranty revenue.

Answer 2

Answer: Please refer to Explanation

Step-by-step explanation:

1.

August 1,2019

DR Accounts Receivable - Mendez Company $739,200

CR Sales $720,000

CR Unearned Warranty Revenue $19,200

(To record Sales on Account to Mendez Company)

Dec 31, 2019

DR Warranty expense $9,200.00

CR Cash $9,200.00

(To record Warranty Expense incurred)

Dec 31, 2019

DR Unearned warranty revenue $8,000.00

CR Warranty revenue $8,000.00

(To record Warranty Revenue Earned)

Dec 31, 2020

DR Warranty expense $7,000.00

CR Cash $7,000.00

(To record Warranty Expense Incurred)

Dec 31 2020

DR Unearned warranty revenue $11,200.00

CR Warranty revenue $11,200.00

(To record Warranty Revenue Earned)

Workings

Sales

=1,600 wiglows * $450

= $720,000

Unearned Warranty Revenue - this is the amount that Mendez paid for a one year service-type warranty.

= 1,600 * 12

= $19,200

Warranty Revenue for 2019.

The warranty was for a year but only 5 months have passed at year's end since August 1 so the 5 months will be apportioned to enable it to be recorded for 2019, the total Unearned Warranty Revenue received will be apportioned as such,

= 5/12 * 19,200

= $8,000.

So $8,000 will be considered as earned for the year 2019.

Warranty Revenue 2020.

The rest of the Warranty will be recorded and earned in 2020.

= 19,200 - 8,000 (amount for 2019)

= $11,200

b)

The Unearned Warranty Revenue remaining will be reported as a Current liability as the period of a Year has not expired and so it cannot be considered as earned.

Dec 31 2019

Partial Balance Sheet.

Current Liabilities

Unearned warranty revenue $11,200.00