Chapter 3 Warranty Liability PDF

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ANDREA GERALDINO BSA 2B CHAPTER 3 WARRANTY LIABILITY Problem 3-1 (IAA) 1. Prepare journal entry in connection with the warranty using the “expense as incurred” approach. 2020 Cash Sales Warranty expense Cash 2021

4,500,000 4,500,000 40,000 40,000

Cash

7,500,000

Sales Warranty expense Cash

150,000

7,500,000 150,000

2. Prepare journal entries in connection with the warranty using the “accrual” approach. 2020 Cash Sales Warranty expense Estimated warranty liability Estimated warranty liability Cash 2021 Cash Sales Warranty expense Estimated warranty liability Estimated warranty liability Cash

4,500,000 4,500,000 144,000 144,000 40,000 40,000 7,500,000 7,500,000 240,000 240,000 150,000 150,000

3. Determine the estimated warranty liability on December 31,2021. Warranty expense: 2020 2021 Actual warranty payments: 2020 2021 Estimated warranty liability Dec. 31, 2021

144,000 240,000 384,000 40,000 150,000 190,000 194,000

4. Analyze the estimated warranty liability account to ascertain whether the actual warranty costs approximate the estimate. The sales and warranty repairs are made evenly during the year. Warranty expense related to 2020 sales 2020 First contract year of Jan. 1,2020 sales (150 x 20% x 800) First contract year of July 1,2020 sales (150 x 20% x 800 x 6/12) 2021 First contract year of July 1,2020 sales (150 x 20% x 800 x 6/12) Second contract year of Jan. 1,2020 sales (150 x 40% x 800) Second contract year of July 1,2020 sales (150 x 40% x 800 x 6/12) 2022 Second contract year of July 1,2020 sales (150 x 40% x 800 x 6/12) Warranty expense for 2020

24,000 12,000 12,000 48,000 24,000 24,000 144,000

Warranty expense related to 2021 sales 2021 First contract year of Jan. 1,2021 sales (250 x 20% x 800) First contract year of July 1,2021 sales (250 x 20% x 800 x 6/12) 2022 First contract year of July 1,2021 sales (250 x 20% x 800 x 6/12) Second contract year of Jan. 1,2021 sales (250 x 40% x 800) Second contract year of July 1,2021 sales (250 x 40% x 800 x 6/12) 2023 Second contract year of July 1,2021 sales (250 x 40% x 800 x 6/12) Warranty expense for 2021

40,000 20,000 20,000 80,000 40,000 40,000 240,000

5. Prepare journal entry to correct the estimated warranty liability on December 31,2021 2020 sales still under warranty after December 3,2021: Second contract year of July 1,2020 sales 2021 sales still under warranty after December 2021 First contract year of July 1,2021 sales Second contract year of Jan. 1,2021 sales Second contract year of July 1,2021 sales

24,000 20,000 80,000 80,000

Estimated warranty liability December 31,2021 Estimated warranty liability per book Increase in warranty liability Warranty expense Estimated warranty liability

204,000 194,000 10,000 10,000 10,000

Problem 3-2 (AICPA Adapted) 1. Prepare journal entries in connection with the warranty using the expense as incurred approach 2020 Cash Sales Warranty expense Cash 2021

5,000,000 5,000,000 200,000 200,000

Cash

9,000,000

Sales Warranty expense Cash

560,000

9,000,000 560,000

2. Prepare journal entries in connection with the warranty using accrual approach 2020 Cash Sales Warranty expense Estimated warranty liability Estimated warranty liability Cash 2021 Cash Sales Warranty expense Estimated warranty liability Estimated warranty liability Cash

5,000,000 5,000,000 700,000 700,000 200,000 200,000 9,000,000 9,000,000 1,260,000 1,260,000 560,000 560,000

3. Determine the estimated warranty liability on December 31, 2021 Warranty expense: 2020 700,000 2021 1,260,000 1,960,000 Actual warranty payments: 2020 200,000 2021 560,000 760,000

Estimated warranty liability Dec. 31, 2021

1,200,000

4. Analyze the estimated warranty liability account to ascertain whether the actual warranty costs approximate the estimate. The sales and warranty repairs are made evenly during the year. Warranty expense related to 2020 sales 2020 First contract year of Jan. 1,2020 sales (2,500,000 x 4%) First contact year of July 1, 2020 sales (2,500,000 x 4% x 6/12) 2021 First contact year of July 1, 2020 sales (2,500,000 x 4% x 6/12) Second contract year of Jan. 1 2020 sales (2,500,000 x 10%) Second contract year of July 1 2020 sales (2,500,000 x 10% x 6/12) 2022 Second contract year of July 1 2020 sales (2,500,000 x 10% x 6/12) Warranty expense for 2020

100,000 50,000 50,000 250,000 125,000 125,000 700,000

Warranty expense related to 2021 sales 2021 First contract year of Jan. 1, 2021 sales (4,500,000 x 4%) First contract year of July 1, 2021 sales (4,500.000 x 4% x 6/12) 2022 First contract year of July 1, 2021 sales (4,500.000 x 4% x 6/12) Second contract year of Jan. 1, 2021 sales (4,500,000 x 10%) Second contract year of July 1, 2021 sales (4,500,000 x 10%x 6/12) 2023 Second contract year of July 1, 2021 sales (4,500,000 x 10%x 6/12) Warranty expense for2021

180,000 90,000 90,000 450,000 225,000 225,000 1,260,000

5. Prepare journal entry to correct the estimated warranty liability on December 31,2021 2020 sales still under warranty after December 31,2021 Second contract year of July 1 2020 sales (2,500,000 x 10% x 6/12) 2021 sales still under warranty after December 31,2021 First contract year of July 1, 2021 sales (4,500.000 x 4% x 6/12) Second contract year of Jan. 1, 2021 sales (4,500,000 x 10%) Second contract year of July 1, 2021 sales (4,500,000 x 10%x 6/12) Estimated warranty liability December 31,2021 Estimated warranty liability per book Decrease in warranty liability Estimated warranty liability Warranty expense

85,000 85,000

125,000 90,000 450,000 450,000 1,115,000 1,200,000 (85,000)

Problem 3-3 (IAA) 1. Prepare journal entries to record the transactions for 2020 and 2021 2020 Cash Sales Warranty expense Estimated warranty liability Estimated warranty liability Cash

5,000,000 5,000,000 600,000 600,000 100,000 100,000

2021 Cash Sales Warranty expense Estimated warranty liability Estimated warranty liability Cash

7,000,000 7,000,000 840,000 840,000 250,000 250,000

2. Analyze the estimated warranty liability account on December 31,2021 to ascertain if the actual repairs approximate the estimate. The sales and repairs occur evenly through the year Warranty expense for 2020 and 2021 Actual warranty repairs Estimated warranty liability December 31,2021

1,440,000 350,000 1,090,000

Warranty expense related to 2020 sales 2020 First contract year of Jan. 1, 2020 sales (2,500,000 x 3%) First contract year of July 1, 2020 sales (2,500,000 x 3% x 6/12) 2021 First contract year of July 1, 2020 sales (2,500,000 x 3% x 6/12) Second contract of Jan. 1, 2020 sales (2,500,000 x 9%) Second contract year of July 1, 2020 sales (2,500,000 x 9% x 6/12) 2022 Second contract year of July 1, 2020 sales (2,500,000 x 9% x 6/12) Warranty expense for 2020

112,500 600,000

Warranty expense related to 2021 sales 2021 First contract year of Jan. 1, 2021 sales (3,500,000 x 3%)

105,000

75,000 37,500 37,500 225,000 112,500

First contract year of July 1, 2021 sales (3,500,000 x 3% x6/12) 2022 First contract year of July 1, 2021 sales (3,500,000 x 3% x6/12) Second contract year of Jan. 1, 2021 sales (3,500,000 x 9%) Second contract year of July 1,2021 sales (3,500,00 x 9% x 6/12) 2023 Second contract year of July 1,2021 sales (3,500,00 x 9% x 6/12) Warranty expense for 2021

52,500 52,500 315,000 157,500 157,500 840,000

3. Prepare the adjustment of the estimated warranty liability on December 31,2021 2020 sales still under warranty after December 31, 2021 Second contract year of July 1, 2020 sales (2,500,000 x 9% x 6/12) 2021 sales still under warranty after December 31, 2021 First contract year of July 1, 2021 sales (3,500,000 x 3% x6/12) Second contract year of Jan. 1, 2021 sales (3,500,000 x 9%) Second contract year of July 1,2021 sales (3,500,00 x 9% x 6/12) Estimated warranty liability December 31,2021 Estimated warranty liability per book Decrease in warranty liability Estimated warranty liability Warranty expense

Sales Warranty expense Estimated warranty liability Estimated warranty liability Cash 2021 Estimated warranty liability Cash

52,500 315,000 315,500 795,000 1,090,000 (295,000)

295,000

Problem 3-4 (IAA) 1. Prepare journal entries for 2019, 2020, and 2021 2019 Cash Sales Warranty expense Estimated warranty liability 2020 Cash

112,500

295,000

9,000,000 9,000,000 450,000 450,000 8,325,000 8,325,000 405,000 405,000 180,000 180,000 470,000 470,000

2. Analyze the estimated warranty liability account to prove the reasonable accuracy of the balance on December 31,2021 Warranty expense related to 2019 sales 2020 First contract year of December 31,2019 sales (450,000 x 40%) 180,000 2021 Second contract year of December 31,2019 (450,000 x 60%) 270,000 Warranty expense for 2019 450,000 Warranty expense related to 2020 sales 2021 First contract year of December 31,2020 sales (405,000 x 40) 2022 Second contract year of December 31,2020 sales (405,000 x 60%) Warranty expense for 2020

162,000 243,000 405,000

3. Prepare the adjustment of the estimated warranty liability on December 31, 2021 2019 sales still under warranty after December 31,2021 0 2020 sales still under warranty after December 31,2021 Second contract year of December 31,2020 sales (405,000 x 60%) 243,000 Estimated warrantyliability December 31,2021 243,000 Estimated warranty liability per book 205,000 Decrease in warranty liability (38,000) Estimated warranty liability Warranty expense Problem 3-19 (IAA) 1. D 2. C 3. D 4. C 5. A

38,000 38,000...