Question

On January 2, 2017, Grando Company sells production equipment to Fargo Inc. for \(50,000. Grando includes a 2-year assurance warranty service with the sale of all its equipment. The customer receives and pays for the equipment on January 2, 2017. During 2017, Grando incurs costs related to warranties of \)900. At December 31, 2017, Grando estimates that \(650 of warranty costs will be incurred in the second year of the warranty.

Instructions

(a) Prepare the journal entry to record this transaction on January 2, 2017, and on December 31, 2017 (assuming financial statements are prepared on December 31, 2017).

(b) Repeat the requirements for (a), assuming that in addition to the assurance warranty, Grando sold an extended warranty (service-type warranty) for an additional 2 years (2019–2020) for \)800.

Short answer

In the first case, cash is $50,000.

In the second case, cash is $50,800.

Step-by-step solution

Warranty Arrangement

A warranty agreement is an agreement between a manufacturer and a buyer in which the manufacturer commits torepair or replace, free of charge any item that proves to be defective in material or workmanship. A warranty agreement is an unavoidable part of every products transaction.

Journal entries for Grando Company

(a)

Date	Particular	Debit ($)	Credit ($)
January 2, 2017	Cash a/c	50,000
	Sales revenue a/c		50,000
December 31, 2017	Warranty expense a/c	900
	Cash, labor, parts a/c		900
December 31, 2017	Warranty expense a/c	650
	Warranty liability a/c		650

(b)

Date	Particular	Debit ($)	Credit ($)
January 2, 2017	Cash a/c	50,800
	Sales revenue a/c		50,000
	Unearned warranty revenue a/c		800
December 31, 2017	Warranty expense a/c	900
	Cash, labor, parts a/c		900
December 31, 2017	Warranty expense a/c	650
	Warranty liability a/c		650