In the below attached question, can I please get some clarification:In part a shouldn't the Merchandise Inventory be credited and the Estimated Product Warranty Liability debited be 60,000. Representing the full cost of replacing the cellphones as it actually cost 60,000 to replace the phones, thus decreasing merchandise inventory by 60,000. Is this not an adjusting entry to account for the actual amount of warranty liability and merchandise inventory decreasing?The second transaction in b would then contain the amount of $20,160 to estimate for the potential warranty liability for the month.Thank you very much. a. The cost of cell phones replaced under warranty:DateAccount TitleDebitCreditSepCash$9,860Estimated product warranty liabilityService revenueMerchandise inventory$20,160$9,860$20,160|(to record estimated product warranty)Working:Estimated liability for product warranty=(2, 800 × 0.03) × $240=84 x $240=$20, 160Step 2b. The estimate liability for product warranties for cell phones sold during the month:DateAccount TitleDebitCreditSepProduct warranty expense$60,000Estimated product warranty liability|(to record estimated product warranty)$60,000%24 Reliance Company manufactures and sells wireless video cellphones, which it guarantees for five years. It a cell phone tails, it isreplaced free, but the customer is charged a service fee forhandling. In the past, management has found that only 3 percent ofthe cell phones sold required replacement under the warranty. Theaverage cell phone costs the company $240. At the beginning ofSeptember, the account for estimated liability for productwarranties had a credit balance of $208,000. During September, 250cell phones were returned under the warranty. The companycollected $9,860 of service fees for handling. During the month, thecompany sold 2,800 cell phones.REQUIRED1. Prepare journal entries to record (a) the cost of cell phonesreplaced under warranty and (b) the estimated liability forproduct warranties for cell phones sold during the month.2. Compute the balance of the Estimated Product WarrantyLiability account at the end of the month.3. If the company's product warranty liability isunderestimated, what are the effects on current and futureyears' income?

Product Warranty: It is the guarantee by a manufacturer of a product .It tells about the…

Answered: 1. Prepare journal entries to record…

FINANCIAL ACCOUNTING

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Chapter1: Financial Statements And Business Decisions

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In the below attached question, can I please get some clarification:

In part a shouldn't the Merchandise Inventory be credited and the Estimated Product Warranty Liability debited be 60,000. Representing the full cost of replacing the cellphones as it actually cost 60,000 to replace the phones, thus decreasing merchandise inventory by 60,000. Is this not an adjusting entry to account for the actual amount of warranty liability and merchandise inventory decreasing?

The second transaction in b would then contain the amount of $20,160 to estimate for the potential warranty liability for the month.

Thank you very much.

a. The cost of cell phones replaced under warranty:
Date
Account Title
Debit
Credit
Sep
Cash
$
9,860
Estimated product warranty liability
Service revenue
Merchandise inventory
$
20,160
$
9,860
$
20,160
|(to record estimated product warranty)
Working:
Estimated liability for product warranty=(2, 800 × 0.03) × $240
=84 x $240
=$20, 160
Step 2
b. The estimate liability for product warranties for cell phones sold during the month:
Date
Account Title
Debit
Credit
Sep
Product warranty expense
$
60,000
Estimated product warranty liability
|(to record estimated product warranty)
$
60,000
%24

Reliance Company manufactures and sells wireless video cell
phones, which it guarantees for five years. It a cell phone tails, it is
replaced free, but the customer is charged a service fee for
handling. In the past, management has found that only 3 percent of
the cell phones sold required replacement under the warranty. The
average cell phone costs the company $240. At the beginning of
September, the account for estimated liability for product
warranties had a credit balance of $208,000. During September, 250
cell phones were returned under the warranty. The company
collected $9,860 of service fees for handling. During the month, the
company sold 2,800 cell phones.
REQUIRED
1. Prepare journal entries to record (a) the cost of cell phones
replaced under warranty and (b) the estimated liability for
product warranties for cell phones sold during the month.
2. Compute the balance of the Estimated Product Warranty
Liability account at the end of the month.
3. If the company's product warranty liability is
underestimated, what are the effects on current and future
years' income?

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