Beck Company sells a product for $3,200. When the customer buys it, Beck provides a one-year warranty. Beck sold 120 products during 2017. Based on analysis of past warranty records, Beck estimates that repairs will average 4% of total sales.
Required
1. Prepare the journal entry to record the estimated liability.
2. Assume that during 2017, products under warranty must be repaired using repair parts from inventory costing $10,200. Prepare the journal entry to record the repair of products.
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3. Assume that the balance of the Estimated Liability for Warranties account as of the beginning of 2017 was $1,100. Calculate the balance of the account as of the end of 2017.
SOLUTION
1.The effect of the recording of the estimated warranty costs can be identified and analyzed as follows:
Balance Sheet
Balance Sheet
Balance Sheet
Balance Sheet
Balance Sheet
Income Statement
Income Statement
Income Statement
Income Statement
Income Statement
Income Statement
Assets
=
Liabilities
+
Stockholders’ Equity
Stockholders’ Equity
Revenues
–
Expenses
=
Net Income
Estimated Liability for Warranties 15,360*
(15,360)
(15,360)
Warranty Expense 15,360
(15,360)
*$3,200 × 120 × 4% = $15,360
2.
The effect of recording the actual warranty costs can be identified and analyzed as follows: