(Warranties, Accrual, and Cash Basis) Albert Pujols Company sells a machine for $7,400 under 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 650 machines in 2005 (warranty expense is incurred half in 2005 and half in 2006). As a result of product testing, the company estimates that the warranty cost is $370 per machine ($170 parts and $200 labor).

Instructions Assuming that actual warranty costs are incurred exactly as estimated, what journal entries would be made relative to the following facts?

(a) Under application of the expense warranty accrual method for:

(1) Sale of machinery in 2005.

(2) Warranty costs incurred in 2005.

(3) Warranty expense charged against 2005 revenues.

(4) Warranty costs incurred in 2006.

(b) Under application of the cash basis method for:

(1) Sale of machinery in 2005.

(2) Warranty costs incurred in 2005.

(3) Warranty expense charged against 2005 revenues.

(4) Warranty costs incurred in 2006.

(c) What amount, if any, is disclosed in the balance sheet as a liability for future warranty costs as of December 31, 2005, under each method?

(d) Which method best reflects the income in 2005 and 2006 of Albert Pujols Company? Why?