Question

Alvarado Company sells a machine for $7,400 with a 12-month warranty agreement that requires the company to replace all defective parts and to provide the repair labor at no cost to the customers. With sales being made evenly throughout the year, the company sells 600 machines in 2017 (warranty expense is incurred half in 2017 and half in 2018). As a result of product testing, the company estimates that the total warranty cost is $390 per machine ($170 parts and $220 labor).

Required:
Assuming that actual warranty costs are incurred exactly as estimated, what journal entries would be made relative to the following facts?

a. Sale of machinery and warranty expense incurred in 2017.
b. Warranty accrual on December 31, 2017.
c. Warranty costs incurred in 2018.
d. What amount, if any, is disclosed in the balance sheet as a liability for future warranty costs as of December 31, 2017?

Answer 1

a.

Sale of machinery

Cash $4,440,000 (debit)

Revenue $4,440,000 (credit)

When Warranty expense incurrs 2017

Warranty Provision $117,000 (debit)

Parts Inventory $51,000 (credit)

Salaries and Wages $66,000 (credit)

b.

Warranty expense recognised 2017

Warranty Expense $117,000 (debit)

Warranty Provision $117,000 (credit)

c.

When Warranty expense incurrs 2018

Warranty Provision $117,000 (debit)

Parts Inventory $51,000 (credit)

Salaries and Wages $66,000 (credit)

d.

No future warranty costs are disclosed as of December 31, 2017

Step-by-step explanation:

Sale of machinery and warranty expense incurred in 2017

Sale of machinery

Cash $4,440,000 (debit)

Revenue $4,440,000 (credit)

Being Sale of Machine in ordinary course of business

Revenue Calculation = $7,400 × 600 machines

= $4,440,000

Warranty expense recognised 2017

Warranty Expense $117,000 (debit)

Warranty Provision $117,000 (credit)

Being Recognition of Warranty Expense and Provision

Warranty Expense Calculation = $390 × 600 machines

= $234,000

Warranty Expense Calculation 2017 = $234,000 / 2

= $117,000

When Warranty expense incurrs 2017

Warranty Provision $117,000 (debit)

Parts Inventory $51,000 (credit)

Salaries and Wages $66,000 (credit)

Warranty expense recognised 2018

Warranty Expense $117,000 (debit)

Warranty Provision $117,000 (credit)

Being Recognition of Warranty Expense and Provision

Warranty Expense Calculation = $390 × 600 machines

= $234,000

Warranty Expense Calculation 2018 = $234,000 / 2

= $117,000

When Warranty expense incurrs 2018

Warranty Provision $117,000 (debit)

Parts Inventory $51,000 (credit)

Salaries and Wages $66,000 (credit)

Disclosure

The Provision for Warranty is already utilised in full when actual warranty costs are incurred exactly as estimated, thus No future warranty costs as of December 31, 2017 are disclosed