Question

Accounting for warranties, vacancies and bonuses

McNight Industries completed the following transactions during 2008:

Nov.21	Made sales of \(52,000. McNight estimates that warranty expense is 6% of sales.(Record only the warranty expense.)
30	Paid \)1,600 to satisfy warranty claims.
Dec.31	Estimated vacation benefits expense to be \(6,000
31	McNight expected to pay its employees a 3% bonus on net income after deducting the bonus. Net income for the year is \)52,000

Journalize the transactions. Explanations are not required. Round to the nearest dollar.

Short answer

Employee bonus=$1,515

Step-by-step solution

Meaning of warranties

A business's warranty cost is the real or expected toll caused to settle or supplant the items sold. The total sum included is capped at the length of the business's warranty period. Businesses are not at risk for warranties once this period has passed.

Preparing journal entries

Date	Particulars	Debit($)	Credit($)
Nov.1	Warranty expense ($52,000 x 6%)	3,120
	Estimated warranty payable		3,120
Nov.20	Estimated warranty payable	1,600
	Cash		1,600
Dec.31	Vacation benefit expense	6,000
	Employee bonus payable		6,000

Dec.31	Employee bonus expense	1,515
	Employee bonus payable		1,515

Working notes:

Calculation of employee bonus:

$\begin{array}{rcl}\mathrm{Employee}\mathrm{bonus}& =& \mathrm{Net}\mathrm{income}\times \left(\frac{\mathrm{Bonus}\mathrm{rate}}{1+\mathrm{Bonus}\mathrm{rate}}\right)\\ & =& \$52,000\times \left(\frac{3}{103}\right)\\ & =& \$1,515\end{array}$