9th Edition

ISBN: 9781259722660

Author: J. David Spiceland, Mark W. Nelson, Wayne M Thomas

Publisher: McGraw-Hill Education

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Textbook Question

Chapter 13, Problem 13.15E

Warranties

• LO13–5, LO13–6

Cupola Awning Corporation introduced a new line of commercial awnings in 2018 that carry a two-year warranty against manufacturer’s defects. Based on their experience with previous product introductions, warranty costs are expected to approximate 3% of sales. Sales and actual warranty expenditures for the first year of selling the product were:

S a l e s $ 5 , 000 , 000 A c t u a l W a r r a n t y E x p e n d i t u r e s $ 37 , 500

Required:

1. Does this situation represent a loss contingency? Why or why not? How should Cupola account for it?
2. Prepare journal entries that summarize sales of the awnings (assume all credit sales) and any aspects of the warranty that should be recorded during 2018.
3. What amount should Cupola report as a liability at December 31, 2018?

Definition Definition Costs that a business is responsible for paying, should a particular event potentially occur in the future. Also called a potential liability, a contingent liability is generally recorded only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly. The Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Principles (IFRS) make it mandatory for the companies to record any contingent liability taking the principles of full disclosure, materiality, and prudence into consideration.

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Chapter 13, Problem 13.14E

Chapter 13, Problem 13.16E

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EXERCISE 7 Filmore Company started selling a new product that carried a 2-year warranty against defects. The warranty provides assurance that the new product will function as intended based on agreed-upon specifications. Based on past experiences with other products, the estimated warranty costs related to peso sales are computed as follows: First year of warranty 3% Second year of waranty 5% Total sales and actual warranty repairs for 2019 and 2020 are given: 2019 2020 P 4,200,000 Actual warranty expenditures 148,800 Sales P 6,960,000 180,000 REQUIRED: a.) What amount should Fillmore report as its estimated warranty liability as of December 31,2020? b.) Based on the above data, assuming that sales and repairs occur evenly throughout the year, how much would be the predicted warranty expense covering 2019 and 2020 sales still under warranty at December 31,2020?

Problem 1 In 2020, Plumpton Company started selling new computer that carried a 2-year warranty against defects Based on the manufacturer's recommendations, the entity estimated warranty cost as a percentage of sales. First year of warranty Second year of warranty 3% 9% Sales and actual warranty repairs are as follows: Sales Actual warranty repairs 2020 P5.000.000 100.000 2021 P7.000.000 250.000 1. How much is the warranty expense for 2020? 2. How much is the estimated warranty liability for 2021 ?

5 Check my work Exercise 13-16 (Algo) Extended warranties [LO13-5, 13-6] Carnes Electronics sells consumer electronics that carry a 90-day manufacturer's warranty. At the time of purchase, customers are offered the opportunity to also buy a two-year extended warranty for an additional charge. During the year, Carnes received $430,000 for these extended warranties, and on average the warranties were 20% expired by year end. Required: 1-a. Does this situation represent a loss contingency? 1-b. How should it be accounted for? 2. Prepare journal entries that summarize sales of the extended warranties and recognition of any revenue associated with those warranties. Complete this question by entering your answers in the tabs below. Req 1A Req 1B Req 2 How should it be accounted for? Revenue is recognized as a(n) and warranty revenue is computed using the Req 1A Req 2 >

Chapter 13 Solutions

Intermediate Accounting

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Solution Summary: The author explains that warranty is an assurance provided to a customer by the seller, and is recognized at the time of sale.

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