Aqua Boats guarantees its boats for three years or 1,500 hours, whichever comes

Question

Aqua Boats guarantees its boats for three years or 1,500 hours, whichever comes first. Industry experience indicates that Aqua can expect warranty costs will equal 4 percent of sales. Assume in its first year, Aqua Boats had sales totaling $477,000, receiving cash for 63 percent of sales and notes receivable for the remainder. Warranty payments totaled $16,200 during the year Read the Requirement 1. Record the sales, warranty expense, and warranty payments for Aqua Boats. Ignore cost of goods sold. (Record debits first, then credits. Exclude explanations from any journal entries.) Start by recording the sales. Journal Entry Date Accounts Debit Credit

Explanation / Answer

Answer 1. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1 Cash    300,510.00 $477,000 X 63% Notes Receivable    176,490.00 $477,000 X 37%    Sales    477,000.00 (To record the sales revenue) 2 Warranty Expenses      19,080.00 $477,000 X 4%    Estimated Warranty Payable      19,080.00 (To record the warranty expenses) 3 Estimated Warranty Payable      16,200.00    Cash      16,200.00 (To record the warranty paid) Answer 2. Estimated Warranted Payable Beg. Bal.                   -   Cash Paid    16,200.00    19,080.00 Warranty Exp. End. Bal.      2,880.00 At the End of First year, Estimated Warranty Payable = $2,880 Answer 3. Warranty Expenses = $19,080 As shown above, Warranty Expenses ($19,080) > Cash Paid for warrnaty ($16,200) The matching principle states that a company must match revenue with expenses. The warranty expense occurs because the sale took place. The expense is a cost of the sale and therefore should be matched with the revenue generated by that sale.

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