Problem 13-7

Cheyenne Company sells a machine for $6,840 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 620 machines in 2017 (warranty expense is incurred half in 2017 and half in 2018). As a result of product testing, the company estimates that the warranty cost is $384 per machine ($170 parts and $214 labor). Use "Inventory" account to record the warranty expense. Assuming that actual warranty costs are incurred exactly as estimated, what journal entries would be made relative to the following facts?

Sale of machinery and warranty expense incurred in 2017.

Warranty accrual on December 31, 2017.

Warranty costs incurred in 2018.

What amount, if any, is disclosed in the balance sheet as a liability for future warranty costs as of December 31, 2017?