HANDOUT PROBLEM for CURRENT LIABILITIESI.Prepare journal entries for the following chronological transactions anda.You sold merchandise on account for $250,000 on account. The products cost$110,000. Your company uses a perpetual inventory system. Your sales includeda two-year warranty on the product.spent $1,400 to repair products in part "a." which were under warranty.b.Youс.On December 31, 2021, you estimated that there would be an additional $8,000 ofrepairs on products in part "a." You estimated that $5.000 of the repairs wouldoccur in 2022.In 2022, you performed $4,800 of repairs on products from part "a." and $1,920of repairs on products sold in 2022.On December 31, 2022, you estimated that repairs on products sold in 2021d.e.would be an additional $3,500 and for products sold in 2022 would be anadditional $9,000. You believe that $5,400 of the $9,000 of repairs would occurin 2023.II.Based upon the transaction above, determine the amount of current liabilities onDecember 31, 2021, and on December 31, 2022.III.What are the three criteria for making an entry to record a contingency at the end of theyear?

Answered: in 2023. II. Based upon the transaction…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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HANDOUT PROBLEM for CURRENT LIABILITIES
I.
Prepare journal entries for the following chronological transactions and
a.
You sold merchandise on account for $250,000 on account. The products cost
$110,000. Your company uses a perpetual inventory system. Your sales included
a two-year warranty on the product.
spent $1,400 to repair products in part "a." which were under warranty.
b.
You
с.
On December 31, 2021, you estimated that there would be an additional $8,000 of
repairs on products in part "a." You estimated that $5.000 of the repairs would
occur in 2022.
In 2022, you performed $4,800 of repairs on products from part "a." and $1,920
of repairs on products sold in 2022.
On December 31, 2022, you estimated that repairs on products sold in 2021
d.
e.
would be an additional $3,500 and for products sold in 2022 would be an
additional $9,000. You believe that $5,400 of the $9,000 of repairs would occur
in 2023.
II.
Based upon the transaction above, determine the amount of current liabilities on
December 31, 2021, and on December 31, 2022.
III.
What are the three criteria for making an entry to record a contingency at the end of the
year?

Expert Solution

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The question pertains to warranty liability. Warranty liability is a constructive liability incurred at the time of the sale of the product. However, there remains an uncertainty regarding the timing and the amount of such a liability and hence can be treated as provision also. It is estimated and revised every year at the time of closure. Warranty liabilities are shown under the head current liabilities and provisions in the financial statement.

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