Question

This extra credit covers Chapter 8 specifically notes payable and warranty costs.

Joel runs a repair shop. He warrants select products against manufacturer defects. Joel estimates that warranty expenses will be 5% of sales. During the year 2013, Joel had sales of 3,507,000. Warranty payments were 350,000 and accrued warranty expense from 2012 were 350,000. (6 points )

Using the data above answer the following:

What is warranty expense for 2013

What is the ending balance in the warranty liability account at 12/31/2013

Journalize the warranty expense and payments for 2013.

DATE		DESCRIPTION	POST. REF.	DEBIT	CREDIT

Roberts Corp. Borrowed 35000 from Midland Bank. The note was 6%, 9 months and was issued on March 1, 2012. Roberts has a December year end. ( 6 points)

Using the data above record the following

Record the issuance of the note on 3/1

Record the year end adjustment

Record the payment of the note at maturity

		DESCRIPTION	POST. REF.	DEBIT	CREDIT

Answer 1

(1) Warranty expense as we can see from the question is estimated as 5% of sales.

Therefore the warranty expense for 2013 = 5% of sales

= 3507000* 5%

= $ 175,350

Ending balance in the warranty liabilty account

Description	Debit	Credit	Balance
Opening balance		350,000	350,000
Cash(payment)	350,000		0
warranty expense		175,350	175,350

Therefore the balance in warranty liabilty account as on 31/12/2013 is $175,350

Journal entries for warranty expense and payment

S.No	Description	Debit($)	Credit($)
1	Warranty expense liability	350,000
	Cash		350,000
2	Warranty expense	175,350
	Warranty expense liability		175,350

(2) The notes was issued to Robert Corps on 1/03/2012. It had maturity period of 9 months( i.e payment due on 30/11/2012 )and carried an interest rate of 6%.

Iam assuming interest is payable at the time of maturity.

Interest amount= 35000 * 6% * 9/12= $1575

Journal entries

Date	Transaction	Description	Debit($)	Credit($)
01/03/2012	Issuance	Cash	35,000
		Notes payable		35,000
30/11/2012	Interest accrual	Interest expense	1,575
		Interest payable		1,575
30/11/2012	payment on maturity	Note payable	35,000
		Interest payable	1,575
		Cash		36,575