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 2025 (warranty expense is incurred half in 2025 and half in 2026). 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 costs are incurred exactly as estimated, what journal entries would be made relative to the following facts?

a. Sale of machinery and warranty expense incurred in 2025.

b. Warranty accrual on December 31, 2025.

c. Warranty costs incurred in 2026.

d. What amount, if any, is disclosed in the balance sheet as a liability for future warranty costs as of December 31, 2025?