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Chapter 11: Q11SE (page 606)

Runner guarantees its snowmobiles for three years. Company experience indicates that warranty costs will be approximately 5% of sales. Assume that the Trail Runner dealer in Colorado Springs made sales totaling \(600,000 during 2018. The company received cash for 20% of the sales and notes receivable forthe remainder. Warranty payments totaled \)10,000 during 2018.

Requirements

Record the sales, warranty expense, and warranty payments for the company.

Ignore cost of goods sold.

Short Answer

Expert verified

Answer

Date

Accounts and Explanation

Debit

Credit

Cash

Accounts receivable

Sales revenue

(To record sales)

$ 120,000

$480,000

$600,000

Warranty expense

Warranty payable

(To record warranty liability)

$30,000

$30,000

Warranty payable

Cash

(To record warranty related expenses)

$10,000

$10,000

Step by step solution

01

Step-by-step solution

Step 1:Meaning of Accounts receivable, Warranty expense.

Accounts receivable (AR) is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers.

Warranty expense is the cost that a business expects to or has already incurred for the repair or replacement of goods that it has sold.

02

Calculation for Cash received and Accounts receivable

CashReceived=Sales×20%ofSales=$6,00,000×20100=$1,20,000Accountsreceivable=Sales×80%ofsales=$6,00,000×80100=$4,80,000

03

Explanation of the journal entry

  • To record sales, Cash is debited by $ 120,000, Accounts receivable is debited $ 480,000 and Sales revenue is credited by $ 600,000.
  • To record warranty liability, Warranty expense is debited and Warranty payable is credited with an amount of $ 30,000.
  • To record warranty related expenses, Warranty payable is debited and Cash is credited with an amount of $ 10,000.

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Most popular questions from this chapter

When do businesses record warranty expenses, and why?

The income statement for California Communications follows. Assume California Communications signed a 3-month, 9%, \(3,000 note on June 1, 2018, and that this was the only note payable for the company.

California Communications

Income Statement

Year Ended July 31, 2018

Net Sales Revenue

\) 21,800

Cost of Goods Sold

14,000

Gross Profit

7,800

Operating Expenses:

Selling Expenses

\( 720

Administrative Expenses

1,650

Total Operating Expenses

2,370

Operating Income

5,430

Other Income and (Expenses):

Interest Expense

?

Total Other Income and (Expenses)

?

Net Income before Income Tax Expense

?

Income Tax Expense

1,080

Net Income

\) ?

Requirements

1. Fill in the missing information for California’s year ended July 31, 2018, income statement. Round to the nearest dollar.

2. Compute the times-interest-earned ratio for the company. Round to two decimals.

The following transactions of Belkin Howe occurred during 2018:

Apr. 30 Howe is party to a patent infringement lawsuit of \(230,000. Howe’s attorney is certain it is remote that Howe will lose this lawsuit.

Jun. 30 Estimated warranty expense at 3% of sales of \)390,000.

Jul. 28 Warranty claims paid in the amount of \(6,300.

Sep. 30 Howe is party to a lawsuit for copyright violation of \)90,000. Howe’s attorney advises that it is probable Howe will lose this lawsuit. The attorney estimates the loss at \(90,000.

Dec. 31 Howe estimated warranty expense on sales for the second half of the year of \)520,000 at 3%.

Requirements

1. Journalize required transactions, if any, in Howe’s general journal. Explanations are not required.

2. What is the balance in Estimated Warranty Payable assuming a beginning balance of $0?

Rios Raft Company had the following liabilities.

a. Accounts Payable

b. Note Payable due in 3 years

c. Salaries Payable

d. Note Payable due in 6 months

e. Sales Tax Payable

f. Unearned Revenue due in 8 months

g. Income Tax Payable

Determine whether each liability would be considered a current liability (CL) or a long-term liability (LTL).

Logan White is general manager of Valuepoint Salons. During 2018, White worked for the company all year at a \(13,600 monthly salary. He also earned a year-end bonus equal to 15% of his annual salary.

White’s federal income tax withheld during 2018 was \)1,360 per month, plus \(4,876 on his bonus check. State income tax withheld came to \)150 per month, plus \(60 on the bonus. FICA tax was withheld on the annual earnings. White authorized the following payroll deductions: Charity Fund contribution of 1% of total earnings and life insurance of \)40 per month.

Valuepoint incurred payroll tax expense on White for FICA tax. The company also paid state unemployment tax and federal unemployment tax.

Requirements

1. Compute White’s gross pay, payroll deductions, and net pay for the full year 2018. Round all amounts to the nearest dollar.

2. Compute Valuepoint’s total 2018 payroll tax expense for White.

3. Make the journal entry to record Valuepoint’s expense for White’s total earnings for the year, his payroll deductions, and net pay. Debit Salaries Expense and Bonus Expense as appropriate. Credit liability accounts for the payroll deductions and Cash for net pay. An explanation is not required.

4. Make the journal entry to record the accrual of Valuepoint’s payroll tax expense for White’s total earnings.

5. Make the journal entry for the payment of the payroll withholdings and taxes.
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