Winslow
Corporation sold 150 colour laser copiers in 2011 for $4,000 each, including a
one-year warranty. Maintenance on each machine during the warranty period aver
ages $300.
Instructions
(a)
Prepare entries to record the machine sales and the related warranty costs
under the expense approach. Actual warranty costs incurred in 2011 were
$17,000.
(b)
Based on the data above and assuming that the cash basis is used, prepare the
appropriate entries.
(c)
Is the method in (b) ever acceptable under GAAP? Explain.
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(a)
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Cash (150 X $4,000)......................................................................
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600,000
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Sales.....................................................................................
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600,000
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Warranty Expense..........................................................................
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17,000
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Cash,
Inventory, Accrued Payroll....................................
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17,000
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Warranty Expense ($45,000* –
$17,000)...................................
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28,000
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Estimated
Liability Under
Warranties......................................................................
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28,000
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*(150 X $300)
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(b)
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Cash ...............................................................................................
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600,000
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Sales.....................................................................................
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600,000
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Warranty Expense..........................................................................
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17,000
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Cash,
Inventory, Accrued Payroll....................................
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17,000
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(c) The
cash method of accounting for warranty costs is acceptable when the costs are
not material or when the warranty period is relatively short. It may also be
acceptable when the amount of the liability cannot be reasonably estimated or
if future costs are not likely to be incurred.
