Question

(Warranties) Brooks Corporation sells computers under a 2-year warranty contract that requires the corporation to replace defective parts and to provide the necessary repair labor. During 2017, the corporation sells for cash 400 computers at a unit price of \(2,500. On the basis of past experience, the 2-year warranty costs are estimated to be \)155 for parts and \(185 for labor per unit. (For simplicity, assume that all sales occurred on December 31, 2017.) The warranty is not sold separately from the computer.

Instructions

(a) Record any necessary journal entries in 2017.

(b) What liability relative to these transactions would appear on the December 31, 2017, balance sheet and how would it be classified?

(c) In 2018, the actual warranty costs to Brooks Corporation were \)21,400 for parts and $39,900 for labor. Record any necessary journal entries in 2018.

Short answer

1. Both sides of the journal totals $1,136,000.
2. Current liability and long-term liability of$68,000 each.
3. Both sides of the journal totals$61,300.

Step-by-step solution

Definition of Warranty Liability

The liability account that reports estimated expenses that a business entity will incur for the repair and replacement of faulty products is known as warranty liability.

Necessary Journal entries

Date	Accounts and Explanation	Debit $	Credit $
1	Cash$\left(\$2,500\times 400\right)$	$1,000,000
	Sales revenue		$1,000,000
2	Warranty expenses data-custom-editor="chemistry" $\left(\left(\$185+\$155\right)\times 400\right)$	$136,000
	Warranty liability		$136,000
		$1,136,000	$1,136,000

Liability on 31 December 2017 Balance sheet

Balance sheet

Particular	Amount $
Current liability:
Warranty liability	$68,000
Long-term liability
Warranty liability	$68,000

Necessary journal entries in 2018

Date	Accounts and Explanation	Debit $	Credit $
1	Warranty liability	$61,300
	Inventory		$21,400
	Salaries and wages payable		$39,900
		$61,300	$61,300