Warranties (Learning Objective 3) 5–10 min.

Sundaze Boats guarantees its boats for three years or 1,500 hours, whichever comes first. Past experience indicates that Sundaze can expect warranty costs will equal 4%

of sales. Assume in its first year, Sundaze Boats had sales totaling $607,000, receiving cash for 35% of sales and notes receivable for the remainder. Warranty payments totaled

$18,500 during the year.

1. Record the sales, warranty expense, and warranty payments for Sundaze Boats.

Ignore cost of goods sold.

2. Post relevant portions of the journal entries to the Estimated Warranty Payable T-account. At the end of the first year, how much in estimated warranty payable does Sundaze owe its customers?

3. What amount of warranty expense will Sundaze report during its first year of operations?

Does the warranty expense for the year equal the year’s cash payments for warranties? Which accounting principle addresses this situation?

MyAccountingLab AppendixLO1