Warranties

Bakem Enterprises manufactures and sells Ovens. Bakem provides all customers with a two-year warranty guaranteeing to repair, free of charge, any defects reported during this time period. During the year, it sold 100,000 Ovens for $270 each. Analysis of past warranty records indicates that 12% of all sales will be returned for repair within the warranty period. Bakem expects to incur expenditures of $9 to repair each Oven. The account Estimated Liability for Warranties had a balance of $120,000 on January 1. Bakem incurred $165,000 in actual expenditures during the year.

Required:

Identify and analyze the effect of the events related to the warranty transactions during the year.

The effect of recording the sales transaction:

Activity	- Select your answer -OperatingInvestingFinancingCorrect 1 of Item 1
Accounts	- Select your answer -Cash or Accounts Receivable Increase, Sales IncreaseCash or Accounts Receivable Increase, Sales DecreaseCash or Accounts Receivable Decrease, Sales IncreaseCash or Accounts Receivable Decrease, Sales DecreaseCorrect 2 of Item 1
Statement(s)	- Select your answer -Balance Sheet onlyIncome Statement onlyBalance Sheet and Income StatementCorrect 3 of Item 1

How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.

Balance Sheet

Income Statement

Assets

=

Liabilities

+

Stockholders' Equity

Revenues

Expenses

=

Net Income

- Select your answer -Accounts ReceivableCashNet IncomeRetained EarningsSalesNo EntryCorrect 1 of Item 2

- Select your answer -Accounts ReceivableCashRetained EarningsSalesOwners' EquityNo EntryCorrect 3 of Item 2

- Select your answer -Accounts ReceivableCashRetained EarningsSalesOwners' EquityNo EntryCorrect 6 of Item 2

- Select your answer -Accounts ReceivableCashNet IncomeRetained EarningsSalesNo EntryCorrect 8 of Item 2

The effect of recording estimated warranty cost:

Activity	- Select your answer -OperatingInvestingFinancingCorrect 1 of Item 3
Accounts	- Select your answer -Warranty Expense Increase, Estimated Liability for Warranties IncreaseWarranty Expense Increase, Estimated Liability for Warranties DecreaseWarranty Expense Decrease, Estimated Liability for Warranties IncreaseWarranty Expense Decrease, Estimated Liability for Warranties DecreaseCorrect 2 of Item 3
Statement(s)	- Select your answer -Balance Sheet onlyIncome Statement onlyBalance Sheet and Income StatementCorrect 3 of Item 3

How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.

Balance Sheet

Income Statement

Assets

=

Liabilities

+

Stockholders' Equity

Revenues

Expenses

=

Net Income

- Select your answer -CashEstimated Liability for WarrantiesInventoryLoss on WarrantiesWarranty ExpenseNo EntryCorrect 1 of Item 4

- Select your answer -CashEstimated Liability for WarrantiesLoss on WarrantiesSales RevenueWarranty ExpenseNo EntryCorrect 3 of Item 4

- Select your answer -CashEstimated Liability for WarrantiesLoss on WarrantiesSales RevenueWarranty ExpenseNo EntryCorrect 6 of Item 4

- Select your answer -CashEstimated Liability for WarrantiesInventoryLoss on WarrantiesWarranty ExpenseNo EntryCorrect 8 of Item 4

The effect of recording actual warranty cost:

Activity	- Select your answer -OperatingInvestingFinancingCorrect 1 of Item 5
Accounts	- Select your answer -Estimated Liability for Warranties Increase, Cash/Inventory IncreaseEstimated Liability for Warranties Increase, Cash/Inventory DecreaseEstimated Liability for Warranties Decrease, Cash/Inventory IncreaseEstimated Liability for Warranties Decrease, Cash/Inventory DecreaseCorrect 2 of Item 5
Statement(s)	- Select your answer -Balance Sheet onlyIncome Statement onlyBalance Sheet and Income StatementCorrect 3 of Item 5

How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.

Balance Sheet

Income Statement

Assets

=

Liabilities

+

Stockholders' Equity

Revenues

Expenses

=

Net Income

- Select your answer -CashEstimated Liability for WarrantiesInventoryLoss on WarrantiesSales RevenueNo EntryCorrect 1 of Item 6

- Select your answer -CashEstimated Liability for WarrantiesInventoryLoss on WarrantiesWarranty ExpenseNo EntryCorrect 3 of Item 6

- Select your answer -CashEstimated Liability for WarrantiesInventoryLoss on WarrantiesWarranty ExpenseNo EntryCorrect 6 of Item 6

- Select your answer -CashEstimated Liability for WarrantiesInventoryLoss on WarrantiesSales RevenueNo EntryCorrect 8 of Item 6

Determine the adjusted ending balance in the Estimated Liability for Warranties account.

$