Brooks Corporation sells computers under a 2 year warranty contract that requires the corporation to replace defective parts and to provide the necesary repair labor. During 2010 the corporation sells for cash 400 computers at a unit price of 2,500. On the basis past experience, the 2 year warranty costs are estimated to be $155 for parts and $185 for labor per unit. (For simplicity, assume that all sales occurred on December 31,2010)The warranty is not sold separately from the computer.
1) Record any necessary journal entries in 2010, applying the cash-basis method
2) Record any necessary journal entries in 2010, applying the expense warrenty accrual method.
3) What liability relative to these transactions would appear on the December 31, 2010 balance sheet and how would it be classified if the cash-basis method is applied?
1) Cash (400 * 2500) 1,000,000
This solution provides the calculations and journal entries for (1) and (2) and an explanation for (3).