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Chapter 13: 14BE (page 693)

Leppard Corporation Sells DVD players. The corporation also offers its customers a 4-year warranty contract. During 2017, Leppard sold 20,000 warranty contracts at \(99 each. The corporation spent \)180,000 servicing warranties during 2017. Prepare Leppard’s journal entries for (a) the sale of contracts, (b) the cost of servicing the warranties, and (c) the recognition of warranty revenue. Assume the service costs are inventory costs.

Short Answer

Expert verified

Unearned Warranty Revenue $1980,000

Warranty Expenses $180,000

Unearned Warranty Revenue $495,000

Step by step solution

01

Meaning of Warranty

A warranty refers to a written guarantee issued to the buyer of a product by its manufacturer for agreeing to repair or replace it. The warranty term usually begins at the date of purchase. The form of warranty is a written promise.

02

Leppard’s Journal Entries

(a) the sale of contracts

Date

Account Titles and Explanations

Debit

Credit

(a)

Cash

$1,980,000

Unearned Warranty Revenue

$1,980,000

(To record the sale of contracts)

(b) the cost of servicing the warranties

Date

Accounts Titles and Explanations

Debit

Credit

(b)

Warranty Expenses

$180,000

Inventory

$180,000

(To record the cost of servicing the warranties)

(c) the recognition of warranty revenue

Date

Accounts Titles and Explanations

Debit

Credit

(c)

Unearned Warranty Revenue

$495,000

Warranty Revenue

$495,000

(To record the recognition of warranty revenue)

Working notes:

UnearnedWarrantyRevenue=NumberofWarrantyContracts×ContractPrice=20,000×$99=$1,980,000

WarrantyRevenue=UnearnedWarrantyRevenueNumberofYears=$1,980,0004=$495,000

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Most popular questions from this chapter

BE13-1 (L01) Roley Corporation uses a periodic inventory system and the gross method of accounting for purchase discounts. On July 1, Roley purchased \(60,000 of inventory, terms 2/10, n/30, FOB shipping point. Roley paid freight costs of \)1,200. On July 3, Roley returned damaged goods and received credit of $6,000. On July 10, Roley paid for the goods. Prepare all necessary journal entries for Roley.

Distinguish between a current liability and a long-term debt

(Debt and Equity Investments) Cardinal Paz Corp. carries an account in its general ledger called Investments,which contained debits for investment purchases, and no credits, with the following descriptions.

Feb. 1, 2017 Sharapova Company common stock, \(100 par, 200 shares \) 37,400

April 1 U.S. government bonds, 11%, due April 1, 2027, interest payable

April 1 and October 1, 110 bonds of \(1,000 par each 110,000

July 1 McGrath Company 12% bonds, par \)50,000, dated March 1, 2017,

purchased at 104 plus accrued interest, interest payable

annually on March 1, due March 1, 2037, 54,000

(Round all computations to the nearest dollar.)

(a) Prepare entries necessary to classify the amounts into proper accounts, assuming that the debt securities are classified

as available-for-sale.

(b) Prepare the entry to record the accrued interest and the amortization of premium on December 31, 2017, using the

straight-line method.

(c) The fair values of the investments on December 31, 2017, were:

Sharapova Company common stock \( 31,800

U.S. government bonds 124,700

McGrath Company bonds 58,600

What entry or entries, if any, would you recommend be made?

(d) The U.S. government bonds were sold on July 1, 2018, for \)119,200 plus accrued interest. Give the proper entry.

CA13-2 (Current versus Noncurrent Classification) Rodriguez Corporation includes the following items in its liabilities at December 31, 2017.

l. Notes payable, \(25,000,000 due June 30, 2018.

2. Deposits from customers on equipment ordered by them from Rodriguez, \)6,250,000.

3. Salaries and wages payable, $3,750,000, due January 14, 2018.

Instructions

Indicate in what circumstances, if any, each of the three liabilities above would exclude from current liabilities.

How does the acid-test ratio differ from the current ratio? How are they similar?
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