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    Warranty Costs on Computer Sales

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    Equipment Company sells computers for $1,500 each and also gives each customer a 2-year warranty that requires the company to perform periodic services and to replace defective parts. During 2006, the company sold 700 computers. Based on past experience, the company has estimated the total 2-year warranty costs as $30 for parts and $60 for labor. (Assume sales all occur at December 31, 2006.)

    In 2007, C6. incurred actual warranty costs relative to 2006 computer sales of $10,000 for parts and $18,000 for labor.

    (a) Under the expense warranty treatment, give the entries to reflect the above transactions (accrual method) for 2006 and 2007.
    (b) Under the cash basis method, what are the Warranty Expense balances for 2006 and 2007?
    (c) The transactions of part (a) create what balance under current liabilities in the 2006 balance sheet?

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    Solution Summary

    The solution explains the accounting treatment for warranty expense