Situation 1 Kurama Co., a machinery dealer, sells a machine for P22,200 under a 1-year warranty contract that requires the company to replace all defective parts and provide the necessary repair labor at no cost to customers. With sales being made evenly throughout the year, Kurama sells for cash 600 machines in 20x1 (half of the warranty expense is incurred in 20x1, half in 20x2.) Based on previous experience, the 10-year warranty costs are estimated to be P510 and P660 labor. Assume that in 20x1, these warranty costs are incurred exactly as estimated. Required: 1. What amount of warranty expense would be charged against 20x1 revenue? _________ 2. What amount of warranty liability would appear on the December 31, 20x1 statement of financial position? __________ Situation 2 Cuyos, Inc., a dealer of household appliances, sells washing machines at an average price of P8,100. The company also offers each customer a separate 3-year warranty contract for P810 that requires the company to provide periodic maintenance services and replace defective parts. During 20x1, Cuyos sold 300 washing machines and 270 warranty contracts for cash. The company estimates that the warranty costs are P180 for parts and P360 for labor. Assume sales occurred on December 31, 20x1. Cuyos’ policy is to recognize income from the warranties on a straight-line basis. In 20x2, Cuyos incurred actual costs relative to 20x1 warranty sales of P18,000 for parts and P36,000 for labor. Required: 1. What amount of current liability relative to the transactions above should be reported on the December 31, 20x1 statement of financial position? ___________ 2. What amount of warranty expense would be shown in the income statement for the year ended December 31, 20x2? __________ 3. What amount of current liability relative to the 20x1 warranties would appear on the 20x2 statement of financial position? __________
Situation 1
Kurama Co., a machinery dealer, sells a machine for P22,200 under a 1-year warranty contract that requires
the company to replace all defective parts and provide the necessary repair labor at no cost to customers. With
sales being made evenly throughout the year, Kurama sells for cash 600 machines in 20x1 (half of the warranty
expense is incurred in 20x1, half in 20x2.) Based on previous experience, the 10-year warranty costs are
estimated to be P510 and P660 labor. Assume that in 20x1, these warranty costs are incurred exactly as
estimated.
Required:
1. What amount of warranty expense would be charged against 20x1 revenue? _________
2. What amount of warranty liability would appear on the December 31, 20x1
position
Situation 2
Cuyos, Inc., a dealer of household appliances, sells washing machines at an average price of P8,100. The
company also offers each customer a separate 3-year warranty contract for P810 that requires the company to
provide periodic maintenance services and replace defective parts.
During 20x1, Cuyos sold 300 washing machines and 270 warranty contracts for cash. The company estimates
that the warranty costs are P180 for parts and P360 for labor.
Assume sales occurred on December 31, 20x1. Cuyos’ policy is to recognize income from the warranties on a
straight-line basis. In 20x2, Cuyos incurred actual costs relative to 20x1 warranty sales of P18,000 for parts and
P36,000 for labor.
Required:
1. What amount of current liability relative to the transactions above should be reported on the December
31, 20x1 statement of financial position? ___________
2. What amount of warranty expense would be shown in the income statement for the year ended
December 31, 20x2? __________
3. What amount of current liability relative to the 20x1 warranties would appear on the 20x2 statement of
financial position? __________
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