The Captain Company began operations on January 1, 2016. In 2016, Captain's sales were $400,000, and payments arising out of warranty obligations were $18,000.
?
Required:
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a.
Assume that this is an assurance-type warranty and $0.10 of warranty cost will be incurred for each $1.00 of sales. Prepare the 2016 journal entry(ies) for warranty expense and payments using the modified cash basis.
b.
Assume that this is an assurance-type warranty and $0.10 of warranty cost will be incurred for each $1.00 of sales. Prepare the 2016 journal entry(ies) for warranty expense and payments using the GAAP approach which requires that warranty expense (and the related liability) be accrued in the period of the sale.
c.
Assume that this is a service-type warranty and $0.10 of each $1.00 of sales represents warranty revenue. Prepare the 2016 journal entries related to product sales and warranty activities..
What will be an ideal response?
| a. | Warranty Expense | 18,000 | ? | |
| ? | ? | Cash (or other assets) | ? | 18,000 |
| ? | ? | ? | ? | |
| b. | Warranty Expense | 40,000 | ? | |
| ? | ? | Estimated Liability under Warranties | ? | 40,000 |
| ? | ? | ? | ? | |
| ? | Estimated Liability under Warranties | 18,000 | ? | |
| ? | ? | Cash (or other assets) | ? | 18,000 |
| ? | ? | ? | ? | |
| c. | Cash or Accounts Receivable | 400,000 | ? | |
| ? | ? | Sales | ? | 360,000 |
| ? | ? | Unearned Warranty Revenue | ? | 40,000 |
| ? | ? | ? | ? | |
| ? | Warranty Expense | 18,000 | ? | |
| ? | ? | Cash (and other assets) | ? | 18,000 |
| ? | ? | ? | ? | |
| ? | Unearned Warranty Revenue | 18,000 | ? | |
| ? | ? | Warranty Revenue | ? | 18,000 |
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