Alvarado Company sells a machine for $7,400 with a 12-month warranty agreement that requires the company to replace all defective parts and to provide the repair labor at no cost to the customers. With sales being made evenly throughout the year, the company sells 600 machines in 2022 (warranty expenditures are expected half in 2022 and half in 2023). As a result of product testing, the company estimates that the total warranty cost is $390 per machine ($170 parts and $220 labor).

Instructions

Assuming that actual warranty expenditures occur exactly as estimated, what journal entries would be made relative to the following facts?

a. Sale of machinery and warranty expenditures occur in 2022.

b. Warranty accrual on December 31, 2022.

c. Warranty expenditures occur in 2023.

d. What amount, if any, is disclosed in the statement of financial position as a liability for future warranty expenditures as of December 31, 2022?