Pr. 13-156-Warranties Merritt Equip ment Company sells computers for $1,500 each

Question

Pr. 13-156-Warranties Merritt Equip ment Company sells computers for $1,500 each and also gives each customer a 2- ritEcuntr that requires the company to perform periodic services and to replace defective year warranty that requires the compan parts. During 2014, the company sold 900 computers. ased on past experience, the company has estimated the total 2-year warranty costs as $40 for parts and $60 for labor per unit. Assume sales all occur at December 31, 2014.) In 2015, Merritt incurred actual warranty costs relative to 2014 computer sales of $12,000 for parts and $18,000 for labor. Instructions (a) Under the expense warranty approach, give the entries to reflect the above transactions (b) Under the cash-basis method, what are the Warranty Expense balances for 2014 and 2015? (c) The transactions of part (a) create what balance under current liabilities in the 2014 balance 15 (3 () (arcdeu ahn ehoay ior zos arvg p0ach give the entries to refiet the above transactions (accrual method) for 2014 and 2015 sheet? Solution 13-156 2014 Accounts Receivable. 1,350,000 Sales Revenue .. 1,350,000 Warranty,Expense.T 90,000 90,000

Explanation / Answer

For 900 computers warranty liability will be calculated as follows

900 * ($40 parts + $60 labor) = $90,000

For part 2 Actual warranty is given in the question $12,000 and $18000 which need to be provided from liability created above hence total of two 12,000 +18,000 = $30,000

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