On September 1, 2016, Carolina Electronics Company has 1,000 Blu-ray players ready for sale. On October 1, 2016, 900 are sold, on account, at $125 each with a 1-year assurance-type warranty. Carolina estimates that the warranty cost on each Blu-ray player sold will probably average $10 per unit. During the final 3 months of 2016, Carolina incurred warranty costs of $4,000, and in 2017 warranty costs were $5,000.

Required:

1.	Prepare the journal entries for the preceding transactions.
2.	Show how the preceding items would be reported on the December 31, 2016, balance sheet.
3.	Prepare the journal entries for the preceding transactions using the modified cash basis method.
4.	Next Level Which method produces the better measure of income? Why?

CHART OF ACCOUNTS

Carolina Electronics Company

General Ledger

	ASSETS
111	Cash
121	Accounts Receivable
141	Inventory
152	Prepaid Insurance
181	Equipment
189	Accumulated Depreciation

	LIABILITIES
211	Accounts Payable
231	Salaries Payable
240	Estimated Warranty Liability
250	Unearned Revenue
261	Income Taxes Payable

	EQUITY
311	Common Stock
331	Retained Earnings

	REVENUE
411	Sales Revenue

	EXPENSES
500	Cost of Goods Sold
511	Insurance Expense
512	Utilities Expense
521	Salaries Expense
532	Bad Debt Expense
540	Interest Expense
541	Depreciation Expense
551	Warranty Expense
559	Miscellaneous Expenses
910	Income Tax Expense

Prepare the necessary journal entries to record:

	1. the sale of Blu-ray players on account on October 1, 2016
	2. the related warranty accrual on October 1, 2016
	3. the warranty costs paid during the last quarter of 2016
	4. the warranty costs paid during the 2017
	Additional Instructions

PAGE 9

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7
8

Prepare the necessary journal entries to record the above transactions using the modified cash basis method.

PAGE 9

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6

Show how the items would be reported on the December 31, 2016, balance sheet under U.S. GAAP. Additional Instructions

Carolina Electronics Company

Partial Balance Sheet

December 31, 2016

1	Current Liabilities:
2

Which method produces the better measure of income? Why?

Select the item below that is true in response to the better measure of income and the reason why.

The modified cash basis method provides the better measure of income because it properly matches warranty costs to the revenues that the warranties helped generate. This method also creates a contingent liability representing a companys expected use of resources.

The accrual method provides the better measure of income because it properly matches warranty costs to the revenues that the warranties helped generate. This method also creates a contingent liability representing a companys expected use of resources.

The direct expense method provides the better measure of income because it expenses warranty costs when incurred.

Under the accrual method, a companys liabilities will be misstated. In addition, the accrual method misstates warranty expense, and income, because the actual warranty repair occurs in a period other than the period in which the sale occurs.