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Chapter 13: Q13BE (page 693)

BE 13-13(L03) Streep Factory provides a 2-year warranty with one of its products which was first sold in 2017. Streep sold \(1,000,000 of products subject to the warranty. Streep expects \)125,000 of warranty costs over the next 2 years. In that year, Streep spent $70,000 servicing warranty claims. Prepare Streep’s journal entry to record the sales (ignore cost of goods sold) and the December 31 adjusting entry, assuming the expenditures are inventory costs.

Short Answer

Expert verified

The warranty expense is recorded at $55,000

Step by step solution

01

Meaning of Journal Entry

A journal entry isa detailed record of financial transactions in a business. Recording of a journal entry contains Date or Transaction Number, Particulars, Debit, and Credit columns.The debit amount and the credit amount should be equal. A short narration is written at the end of a journal entry.

02

Journal Entries

Transaction No.

Accounts and Explanations

Debit

Credit

1

Cash / Accounts Receivable

$1,000,000

Sales Revenue

$1,000,000

(To record sales revenue)

2

Warranty Expenses

$70,000

Inventory

$70,000

(To record the warranty expenses)

3

Warranty Expenses($125,000-$70,000)

$55,000

Warranty Liability

$55,000

(To record the adjusting entry)

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Most popular questions from this chapter

Question: What evidence is necessary to demonstrate the ability to defer settlement of short-term debt?

(Fair Value Measurement Issues) Assume the same information as in E17-19 for Lilly Company. In addition,

assume that the investment in the Woods Inc. stock was sold during 2018 for \(195,000. On December 31, 2018, the following

information relates to its two remaining investments of common stock.

Cost Fair Value

(at purchase date) (at December 31)

Investment in Arroyo Company stock \)100,000 \(140,000

Investment in Lee Corporation stock 250,000 310,000

Total \)350,000 \(450,000

Net income before any security gains and losses for 2018 was \)905,000.

Instructions

(a) Compute the amount of net income or net loss that Lilly should report for 2018, taking into consideration Lilly’s securitytransactions for 2018.

(b) Prepare the journal entry to record unrealized gain or loss related to the investment in Arroyo Company stock atDecember 31, 2018.

(Fair Value Option) Presented below is selected information related to the financial instruments of

Dawson Company at December 31, 2017. This is Dawson Company’s first year of operations.

Carrying Fair Value

Amount (at December 31)

Investment in debt securities (intent is to hold to maturity) \( 40,000 \) 41,000

Investment in Chen Company stock 800,000 910,000

Bonds payable 220,000 195,000

Instructions

(a) Dawson elects to use the fair value option for these investments. Assuming that Dawson’s net income is $100,000 in2017 before reporting any securities gains or losses determine Dawson’s net income for 2017. Assume that the differencebetween the carrying value and fair value is due to credit deterioration.

(b) Record the journal entry, if any, necessary at December 31, 2017, to record the fair value option for the bonds payable

(Fair Value Measurement) Presented below is information related to the purchases of common stock by Lilly

Company during 2017.

Cost Fair Value

(at purchase date) (at December 31)

Investment in Arroyo Company stock \(100,000 \) 80,000

Investment in Lee Corporation stock 250,000 300,000

Investment in Woods Inc. stock 180,000 190,000

Total \(530,000 \)570,000

Instructions

(Assume a zero balance for any Fair Value Adjustment account.)

(a) What entry would Lilly make at December 31, 2017, to record the investment in Arroyo Company stock if it chooses to

report this security using the fair value option?

(b) What entry(ies) would Lilly make at December 31, 2017, to record the investments in the Lee and Woods corporations,

assuming that Lilly did not select the fair value option for these investments?

Question: When should liabilities for each of the following items be recorded on the books of an ordinary business corporation?

  1. Acquisition of goods by purchase on credit.
  2. Officers’ salaries.
  3. Special bonus to employees.
  4. Dividends.
  5. Purchase commitments.
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