Allowance method for warranties; reconstructing transactions. Assume that Central Appliance sells appliances, all for cash. It debits all acquisitions of appliances during a year to the Merchandise Inventory account. The company provides warranties on all its products, guaranteeing to make required repairs, within one year of the date of sale, for any of its appliances that break down. The company has many years of experience with its products and warranties.

The schedule shown in Exhibit 9.7 contains summary trial balances for Central Appliance at the end of Year 1 and Year 2. The trial balances for the end of Year 1 are the Adjusted Preclosing Trial Balance (after making all adjusting entries) and the final Post-Closing Trial Balance. The trial balance shown for the end of Year 2 is taken before any adjusting entries of any kind, although the firm made entries to the Estimated Liability for Warranty Repairs account during Year 2 as it made repairs. Central Appliance closes its books once each year.
At the end of Year 2, the management of Central Appliance analyzes the appliances sold within the preceding 12 months. It classifies all appliances still covered by warranty as follows: those sold on or before June 30 (more than six months old), those sold after June 30 but on or before November 30 (more than one month but less than six months old), and those sold on or after December 1. Assume that it estimates that one-half of 1 percent of the appliances sold more than six months ago will require repair, 5 percent of the appliances sold one to six months before the end of the year will require repair, and 8 percent of the appliances sold within the last month will require repair. From this analysis, management estimates that \(\$ 5,000\) of repairs will still have to be made in Year 3 on the appliances sold in Year 2. Ending inventory on December 31, Year 2, is \(\$ 120,000\).

a. What were the total acquisitions of merchandise inventory during Year 2?

b. What was the cost of goods sold for Year 2?

c. What was the dollar amount of repairs made during Year 2?

d. What was the warranty expense for Year 2?

e. Give journal entries for repairs made during Year 2, for the warranty expense for Year 2, and for cost of goods sold for Year 2.

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EXHIBIT 9.7 Trial Balances End of Year 1 CENTRAL APPLIANCE (Problem 36) Estimated Liability for Warranty Repairs Merchandise Inventory Sales Warranty Expense All Other Accounts Totals Trial Balance- End of Year 2 Estimated Liability for Warranty Repairs Merchandise Inventory Sales Warranty Expense All Other Accounts Totals... Adjusted Preclosing Post-Closing Dr. Cr. Dr. Cr. $ 6,000 $ 6,000 $ 100,000 $100,000 800,000 18,000 882,000 $1,000,000 194,000 $1,000,000 110,000 $210,000 204,000 $210,000 Unadjusted Trial Balance Dr. Cr. $ 15,000 820,000 $1,000,000 265,000 $1,100,000 100,000 $1,100,000