Question
Cool Sound Ltd. manufactures a line of amplifiers that carry a three-year warranty against defects. Based on experience, the estimated warranty costs related to dollar
Cool Sound Ltd. manufactures a line of amplifiers that carry a three-year warranty against defects. Based on experience, the estimated warranty costs related to dollar sales are as follows: first year after sale2% of sales; second year after sale3% of sales; and third year after sale4% of sales. Sales and actual warranty expenditures for the first three years of business were:
Sales | Warranty Expenditures | |||
2018 | $810,000 | $16,500 | ||
2019 | 1,070,000 | 47,200 | ||
2020 | 1,036,000 | 83,000 |
Calculate the amount that Cool Sound Ltd. should report as warranty expense on its 2020 income statement and as a warranty liability on its December 31, 2020 SFP using the assurance-type warranty (expense-based approach). Assume that all sales are made evenly throughout each year and that warranty expenditures are also evenly spaced according to the rates above.
- what is the warranty expense for Cool Sound Ltd., on their 2020 income statement
- what is the warranty liability on its December 31, 2020 SF
I am also asking you to prepare journal entries for each year, 2018, 2019, and 2020 to:
- record the sales,
- record the actual warranty expenditure incurred during the year
- prepare the adjusting journal entry at the end of each year to pick up the balance of warranty expense applicable to that year.
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