SECTION A (ANSWER ALL OUR QUESTION 1-20 MARKS PART A (10 marks) 1. Miley Company
ID: 2536107 • Letter: S
Question
SECTION A (ANSWER ALL OUR QUESTION 1-20 MARKS PART A (10 marks) 1. Miley Company sells computers for $1,500 each and also gives each customer a 2-year warranty that requires the company to perform periodic services and to replace defective parts. During 2010, the company sold 700 computers. Based on past experience, the company has estimated the total 2-year warranty costs as $30 for parts and $60 for labor. (Assume sales all occur at December 31, 2010.) In 2011, Miley incurred actual warranty costs relative to 2010 computer sales of $10,000 for parts and $18,000 for labor Instructions (a) Under the expense warrany treatment, give the entries to reflect the above transactions (accrual method) for 2010 and 2011. (3 marks) (b) Under th e cash basis method, what are the Warranty Expense balances for 2010 and 2011? (2 marks) (c) How would the warranty liability be disclosed in the Statement of Financial Position? (2 marks)Explanation / Answer
a. Expense Warranty Treatment:
2010
Accounts Recievable A/c Dr.................................................................................................... $ 1,050,000
Sales A/c Cr...........................................................................................................................$ 1,050,000
Warranty Expense A/c Dr....................................................................................................... $ 63,000
Warranty Liability A/c Cr........................................................................................................ $ 63,000
2011
Warranty Liability Dr............................................................................................................. $ 28,000
Inventory Cr........................................................................................................................ $ 10,000
Labour Charges Cr.............................................................................................................. $ 18,000
b. Cash basis method
2010 : No balance under warranty expense head
Accounts Recievable A/c Dr.................................................................................................... $ 1,050,000
Sales A/c Cr...........................................................................................................................$ 1,050,000
2011: Warranty Expense of $ 28000 shall be provided for the year
Warranty Liability Dr............................................................................................................. $ 28,000
Cash A/c Cr........................................................................................................................ $ 28,000
c. Warrantly liability shall be disclosed under the head of current liabilities for $ 31,500 in the statement of financial position i.e., due in year 2011. The remaining $ 31,500 shall be provided under the head of Non- Current Liabilities.
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