Texans Corp. uses the assurance-type (a.k.a. expense) approach to account for warranties. They sell a used car for $ 30,000 on October 25, 2020, with a one-year warranty covering parts and labour. Warranty expense is estimated at 2% of the selling price, and the appropriate adjusting entry is recorded at December 31, 2020. On March 12, 2021, the car is returned for warranty repairs. This cost Texans the sum of $ 200 in parts and $ 120 in labour.   Instructions Provide appropriate adjusting entries on December 31, 2020.  Briefly explain the assurance type approach to account for warranties.  Provide the entries required on March 12, 2021.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Texans Corp. uses the assurance-type (a.k.a. expense) approach to account for warranties. They sell a used car for $ 30,000 on October 25, 2020, with a one-year warranty covering parts and labour. Warranty expense is estimated at 2% of the selling price, and the appropriate adjusting entry is recorded at December 31, 2020. On March 12, 2021, the car is returned for warranty repairs. This cost Texans the sum of $ 200 in parts and $ 120 in labour.

 

Instructions

  1. Provide appropriate adjusting entries on December 31, 2020. 
  2. Briefly explain the assurance type approach to account for warranties. 
  3. Provide the entries required on March 12, 2021. 
  4. With proper title and classification, present the amount of the warranty liability that would be shown on Texans’ balance sheet on December 31, 2021 
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