Calla Corp. sells equipment that comes with a two-year unlimited warranty on parts and labour for repairs. All sales are cash sales. The warranty is intended to assure customers that the appliances will operate as advertised. The warranty is expected to cost 2% of sales in the first year and 4% of sales in the second year, for a total of 6%. The provision for warranty has a credit balance of $189,000 at the beginning of 20X5. The following events and decisions relate to the warranty: 20X5 Sales revenue of $4,650,000 was generated from products covered by the warranty. Both the sale and the warranty provision must be recorded. 20X5 Warranty work consumed parts inventory with a cost of $8,300, and labour of $33,000. Labour costs were paid in cash. 20X6 Sales revenue from products covered by the warranty were $6,650,000. Both the sale and the warranty provision must be recorded. 20X6 Warranty work consumed parts inventory with a cost of $113,000, and labour of $289,000. Labour costs were paid in cash. 20X6 Year-end review indicated that based on new information the percentage used as an estimate for warranty work in 20X5 and 20X6 should have been a total of 9% of sales, rather than 6%. 20X6 Because of a specific prevalent defect to a seal discovered during repairs in 20X6, the company announced it would cover repairs for this specific defect for a third year for all sales of product made in 20X5 and 20X6. The cost of this work was estimated to be 1.5% of sales. This is in addition to the percentage increase described. above. Products were re-engineered to eliminate the defect starting in 20X7. Required: Prepare journal entries for the events listed above. Because of uncertainty of estimates, no discounting is to be applied. Calculate the ending balance in the warranty provision account at the end of December 31, 20X6 (show calculations for credit). Merely showing an amount, whether right or wrong, will score a zero grade
Calla Corp. sells equipment that comes with a two-year unlimited warranty on parts and labour for repairs. All sales are cash sales. The warranty is intended to assure customers that the appliances will operate as advertised. The warranty is expected to cost 2% of sales in the first year and 4% of sales in the second year, for a total of 6%. The provision for warranty has a credit balance of $189,000 at the beginning of 20X5. The following events and decisions relate to the warranty:
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20X5 |
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Sales revenue of $4,650,000 was generated from products covered by the warranty. Both the sale and the warranty provision must be recorded. |
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20X5 |
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Warranty work consumed parts inventory with a cost of $8,300, and labour of $33,000. Labour costs were paid in cash. |
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20X6 |
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Sales revenue from products covered by the warranty were $6,650,000. Both the sale and the warranty provision must be recorded. |
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20X6 |
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Warranty work consumed parts inventory with a cost of $113,000, and labour of $289,000. Labour costs were paid in cash. |
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20X6 |
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Year-end review indicated that based on new information the percentage used as an estimate for warranty work in 20X5 and 20X6 should have been a total of 9% of sales, rather than 6%. |
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20X6 |
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Because of a specific prevalent defect to a seal discovered during repairs in 20X6, the company announced it would cover repairs for this specific defect for a third year for all sales of product made in 20X5 and 20X6. The cost of this work was estimated to be 1.5% of sales. This is in addition to the percentage increase described. above. Products were re-engineered to eliminate the defect starting in 20X7. |
Required:
- Prepare
journal entries for the events listed above. Because of uncertainty of estimates, no discounting is to be applied. - Calculate the ending balance in the warranty provision account at the end of December 31, 20X6 (show calculations for credit). Merely showing an amount, whether right or wrong, will score a zero grade
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