Question

Landcaster Inc. sells its products with a 2-year service-type warranty. On January 1, Year 1, Landcaster sells 60 machines for $2,500 each, on account. Landcaster determines that the machines normally sell for $2,275 each and the service-type warranty could be purchased for $225 per machine. In Year 1, Landcaster pays $5,000 for warranty costs.

Required:

Landcaster Inc. sells its products with a 2-year service-type warranty. On January 1, Year 1, Landcaster sells 60 machines for $2,500 each, on account. Landcaster determines that the machines normally sell for $2,275 each and the service-type warranty could be purchased for $225 per machine. In Year 1, Landcaster pays $5,000 for warranty costs. Required: Prepare Landcaster’s journal entries related to the sales and warranty in Year 1. X Chart of Accounts CHART OF ACCOUNTS Landcaster Inc. General Ledger ASSETS 111 Cash 121 Accounts Receivable 141 Inventory 152 Prepaid Insurance 181 Equipment 189 Accumulated Depreciation LIABILITIES 211 Accounts Payable 230 Unearned Warranty Revenue 231 Salaries Payable 250 Unearned Revenue 261 Income Taxes Payable EQUITY 311 Common Stock 331 Retained Earnings REVENUE 411 Sales Revenue 438 Warranty Revenue EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 521 Salaries Expense 532 Bad Debt Expense 540 Interest Expense 541 Depreciation Expense 551 Warranty Expense 559 Miscellaneous Expenses 910 Income Tax Expense X General Journal Shaded cells have feedback. Prepare the necessary journal entries to record: 1. The sale of 60 machines on account on January 1 2. The warranty costs paid during the year 3. The warranty revenue earned in Year 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7

Answer 1

Warranty liability is created at the time of sales.(unearned warranty revenue)

As and when expenses are incurred warranty expense is booked and unearned warranty revenue is transferred to warranty revenue.

Date	Account	title post ref	debit	credit
Jan 1	Accounts receivable (60 *$2,500)	111	$150,000
	sales Revenue($2,275*60 machine)	411		$136,500
	unearned warranty revenue (60*$225)	230		$13,500
	(To record sales for year 1)
Dec. 31	warranty expense	551	$5,000
	cash	111		$5,000
	[ to record warrant expense for year 1]
Dec 31	Unearned warranty revenue	230	$5,000
	Warranty Revenue	138		$5,000
	[ to record earned warranty revenue]

(1) cash is an asset which is debited when increased.

unearned warranty revenue is a liability and credited when sales are made by amount of warranty.

(2) As warranty expenses are paid cash will be reduced, so it will be credited.

warranty expense will be recorded on debit side of income statement .

(3) $5000 warranty expenses are paid which will be recorded as earned warranty revenue. As wararnty expenses have already been reimbursed by customers.