Chapter 11: 22E (page 609)

Accounting for warranties, vacancies and bonuses
McNight Industries completed the following transactions during 2008:
Nov.21 Made sales of $52,000. McNight estimates that warranty expense is 6% of sales.(Record only the warranty expense.)
30 Paid $1,600 to satisfy warranty claims.
Dec.31 Estimated vacation benefits expense to be $6,000
31 McNight expected to pay its employees a 3% bonus on net income after deducting the bonus. Net income for the year is $52,000
Journalize the transactions. Explanations are not required. Round to the nearest dollar.

Short Answer

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Employee bonus=$1,515

Step by step solution

Meaning of warranties

A business's warranty cost is the real or expected toll caused to settle or supplant the items sold. The total sum included is capped at the length of the business's warranty period. Businesses are not at risk for warranties once this period has passed.

Preparing journal entries

Date	Particulars	Debit($)	Credit($)
Nov.1	Warranty expense ($52,000 x 6%)	3,120
	Estimated warranty payable		3,120

Nov.20	Estimated warranty payable	1,600
	Cash		1,600

Dec.31	Vacation benefit expense	6,000
	Employee bonus payable		6,000

Dec.31	Employee bonus expense	1,515
	Employee bonus payable		1,515

Working notes:

Calculation of employee bonus:

$\begin{array}{rcl} Employee bonus & = & Net income \times (\frac{Bonus rate}{1 + Bonus rate}) \\ = & $ 52, 000 \times (\frac{3}{103}) \\ = & $ 1, 515 \end{array}$

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Earnings			Withholdings
Beginning Cumulative Earnings	Current Period Earnings	Ending Cumulative Earnings	OASDI	Medicare	Income tax	Health Insurance	United way	Total Withholding	Net pay	Check No.	Salaries and Wages Expense
\( 77,000	\) 4,500				\( 900	\) 90	\(15			801
112,000	7,200				1,200	144	35			802
48,000	3,300				600	66	0			803
61,000	3,300				850	66	20			804
0	4,500				1,100	90	0			805
\)298,000	\(22,800				\)4,650	\(456	\)70

Short Answer

Step by step solution

Meaning of warranties

Preparing journal entries

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Nov.21	Made sales of \(52,000. McNight estimates that warranty expense is 6% of sales.(Record only the warranty expense.)
30	Paid \)1,600 to satisfy warranty claims.
Dec.31	Estimated vacation benefits expense to be \(6,000
31	McNight expected to pay its employees a 3% bonus on net income after deducting the bonus. Net income for the year is \)52,000