Question

Superior Skateboard Company, located in Ontario, is preparing adjusting entries at December 31, 2020. An analysis reveals the following:

1. During December, Superior sold 6,700 skateboards that carry a 60-day warranty. The skateboard sales totalled $392,000. The company expects 8% of the skateboards will need repair under warranty and it estimates that the average repair cost per unit will be $40.
2. A disgruntled employee is suing the company. Legal advisers believe that it is probable that Superior will have to pay damages, the amount of which cannot be reasonably estimated.
3. Superior needs to record previously unrecorded cash sales of $2,120,000 (cost of sales 65%) plus applicable HST.
4. Superior recognizes that $97,000 of $162,000 received in advance for skateboards has now been earned.

Answer 1

ANSWER:

All entries dated December 31, 2020.

a.	Warranty Expense………………………………………	21,440
	Estimated Warranty Liability............................................		21,440
	To record warranty expense; 6,700 units × 8% × $40 = $21,440.

b.

No adjusting entry can be made since the loss cannot be reasonably estimated. The notes to the financial statements must mention the suit as a contingent liability.

c.

Cash........................................................................................... 2,395,600

Sales Revenue................................................................. 2,120,000

HST Payable....................................................................   275,600

   To record sales plus HST: $2,120,000 × 13% = $275,600.

Cost of Goods Sold...................................................................  1,378,000

Merchandise Inventory.....................................................     1,378,000

   To record cost of sales: $2,120,000 × 65% = $1,378,000.

d.

Unearned Product Revenue .................................................................. 97,000

Earned Product Revenue......................................... 97,000

To record earned portion of unearned revenue.