Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 18: 26E (page 1039)

On January 2, 2017, Grando Company sells production equipment to Fargo Inc. for \(50,000. Grando includes a 2-year assurance warranty service with the sale of all its equipment. The customer receives and pays for the equipment on January 2, 2017. During 2017, Grando incurs costs related to warranties of \)900. At December 31, 2017, Grando estimates that \(650 of warranty costs will be incurred in the second year of the warranty.

Instructions

(a) Prepare the journal entry to record this transaction on January 2, 2017, and on December 31, 2017 (assuming financial statements are prepared on December 31, 2017).

(b) Repeat the requirements for (a), assuming that in addition to the assurance warranty, Grando sold an extended warranty (service-type warranty) for an additional 2 years (2019–2020) for \)800.

Short Answer

Expert verified

In the first case, cash is $50,000.

In the second case, cash is $50,800.

Step by step solution

01

Warranty Arrangement

A warranty agreement is an agreement between a manufacturer and a buyer in which the manufacturer commits torepair or replace, free of charge any item that proves to be defective in material or workmanship. A warranty agreement is an unavoidable part of every products transaction.

02

Journal entries for Grando Company

(a)

Date

Particular

Debit ($)

Credit ($)

January 2, 2017

Cash a/c

50,000

Sales revenue a/c

50,000

December 31, 2017

Warranty expense a/c

900

Cash, labor, parts a/c

900

December 31, 2017

Warranty expense a/c

650

Warranty liability a/c

650

(b)

Date

Particular

Debit ($)

Credit ($)

January 2, 2017

Cash a/c

50,800

Sales revenue a/c

50,000

Unearned warranty revenue a/c

800

December 31, 2017

Warranty expense a/c

900

Cash, labor, parts a/c

900

December 31, 2017

Warranty expense a/c

650

Warranty liability a/c

650

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

(Allocate Transaction Price, Modification of Contract) Refer to the Tablet Bundle A revenue arrangement in P18-1. In response to competitive pressure for Internet access for Tablet Bundle A, after 2 years of the 3-year contract, Tablet Tailors offers a modified contract and extension incentive. The extended contract services are similar to those provided in the first 2 years of the contract. Signing the extension and paying $90 (which equals the standalone selling of the revised Internet service package) extends access for 2 more years of Internet connection. Forty Tablet Bundle A customers sign up for this offer.

Instructions

(a) Prepare the journal entries when the contract is signed on January 2, 2019, for the 40 extended contracts. Assume the modification does not result in a separate performance obligation.

Describe the revenue recognition principle.

Frozen Delight, Inc. charges an initial franchise fee of \(75,000 for the right to operate as a franchisee of Frozen Delight. Of this amount, \)25,000 is collected immediately. The remainder is collected in four equal annual installments of \(12,500 each. These installments have a present value of \)41,402. As part of the total franchise fee, Frozen Delight also provides training (with a fair value of $2,000) to help franchisees get the store ready to open. The franchise agreement is signed on April 1, 2017, training is completed, and the store opens on July 1, 2017. Prepare the journal entries required by Frozen Delight in 2017.

What are some examples of variable consideration? What are the two approaches for estimating variable consideration?

Telephone Sellers Inc. sells prepaid telephone cards to customers. Telephone Sellers then pays the telecommunications company, TeleExpress, for the actual use of its telephone lines related to the prepaid telephone cards. Assume that Telephone Sellers sells \(4,000 of prepaid cards in January 2017. It then pays TeleExpress based on usage, which turns out to be 50% in February, 30% in March, and 20% in April. The total payment by Telephone Sellers for TeleExpress lines over the 3 months is \)3,000. Indicate how much income Telephone Sellers should recognize in January, February, March, and April.
See all solutions

Recommended explanations on Business Studies Textbooks

Business Development

Read Explanation

Business Operations

Read Explanation

Managers

Read Explanation

Organizational Behavior

Read Explanation

Nature of Business

Read Explanation

Introduction to Business

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free