Problem7: Chapter 13 - Warranties

Merida Equipment Company sells competitive archery equipment for $3,500 each and, included in the purchase of all equipment sets is a five-year warranty that requires Merida Equipment Company to replace defective parts. For an additional $500, customers may purchase a two-year warranty which allows the customer to bring the archery sets in for an annual tune-up. Based on past experience, the company has estimated the total 5-year warranty costs as $75 for parts and $120 for labor per set related to defects. The purchasable two-year warranties are expected to cost $150 in labor each year. During 2017, the company sold 870 archery sets and three-quarters of customers purchased the additional two-year warranty. Assume sales all occur at December 31, 2017 and the inventory cost on the archery sets is $2,700 per set.

In 2018, Merida Equipment Company incurred actual warranty costs related to defects on 2017 archery set sales of $16,000 in parts and $18,200 in labor. Actual 2018 expenses related to the purchasable two-year warranty was $49,000 in labor costs.

Instructions:

7.1: Record all necessary journal entries related to the sale of the archery sets.

7.2: Record any necessary journal entry(ies) in 2018 related to the assurance warranty.

7.3: Record any necessary journal entry(ies) in 2018 related to the service warranty.