Allowance method for warranties; reconstructing transactions. Assume that Central Appliance sells appliances, ail 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.

Exhibit 9.7 contains summary data and financial statement excerpts for Central Appliance for the end of Year 1 and for some of the events during Year 2. The firm made entries to the Estimated Liability for Warranty Repairs account during Year 2 as it made repairs, which converted the credit balance at the end of Year 1 into a debit balance of $15,000 at the end of Year 2. That is, before the firm makes its entry to recognize warranty expense for the entire year, the Estimated Liability for Warranty Repairs account has a debit balance of $15,000. Also, the Merchandise Inventory account, to which the firm has debited all purchases of inventory, has a balance of $820,000 before the adjusting entry for Cost of Goods Sold, so that Goods Available for Sale totaled $820,000. Central Appliance makes its adjusting entries and closes its books only once each year, at the end of the year.

EXHIBIT 9.7 CENTRAL APPLIANCE

(Problem 37)

Balance Sheet Excerpts Merchandise Inventory All Other Accounts Total Assets Estimated Liability for Warranty Repairs All Other Accounts Total Liabilities and Owners' Equity . . .

Income Statements Excerpts Sales Revenue Warranty Expense End of Year 1

$100,000 110,000

$210,000

$ 6,000 204,000

$210,000 Year 1

$800,000 Cr.

(18,000) Dr.

Year 2 SI, 000,000 Cr.

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. Items remaining in ending inventory on December 31, Year 2, had cost $120,000.

a. What were the total aequisitions of merchandise inventor}, 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. Gi\e journal entries for repairs made during Year 2, for the warranty expense for Year 2.
and for cost of goods sold for Year 2.