Question

Use the information given below to answer Questions 10 - 15. Robin Industries, Inc., [RI] manufactures and sells electronic solid fuel powered vehicles popularly known as BatKars [BK]. All units are sold with under a two-year warranty contract with a commitment to replace defective parts and provide the necessary labor services for such repair . During 2018 the corporation sold 6,000 BKs for cash at a unit price of $4,000. Based on past experience, the two-year warranty contracts are estimated to cost the company $380 per unit which included $80 per unit on parts and the balance for labor. These are recorded at the time when the sales are recorded. During 2018, RI incurred actual costs of $990,000 (which consisted of $444,000 for parts and the rest for labor) on repair work called for by customers on the sold units. Apply the expense-based (assurance-type) approach for answering Questions 10 - 12 stated below. NEXT You are then further informed that RI estimates $500 per unit of the product revenues from the above mentioned sales would would be considered as warranty revenues. 40% of these warranty revenues relate to year 2018 and the balance to year 2019. Now apply the revenue-based (service-type) approach for answering Questions 13 - 15.

10] The entry to record the warranty contracts issued in 2018 would be

a. Warranty Expenses ...... DR $1,080,000; Warranty Expenses Payable ...... CR $ 1,080,000.

b. Warranty expenses ...... DR $2,280,000; Cash ...... CR $2,280,000.

c. Warranty Expenses ...... DR $2,280,000; Estimated Warranty Liabilities ...... CR $2,280,000.

d. Warranty expenses ...... DR $2,280,000; Parts Inventory ...... CR $480,000; Direct Labor ...... CR $1,800,000

e. Warranty expenses ...... DR $24,000,000; Cash ...... CR $24,000,000.

11] Prepare the journal entry to record the actual warranty costs incurred by RI during 2018.

a. Warranty expenses ...... DR $1,080,000; Parts Inventory ...... CR $1,080,000.

b. Estimated Warranty Liabilities ...... DR $1,080,000; Parts Inventory ...... CR $1,080,000.

c. Estimated Warranty Liabilities ...... DR $990,000; Parts Inventory ...... CR $444,000; Direct Labor ...... CR $546,000; ..

d. Warranty expenses ...... DR $1,290,000; Estimated Warranty Liabilities ...... CR $1,290,000.

e. Warranty expenses ...... DR $1,080,000; CR Cash ...... $1,080,000.

12. How would the warranty transactions be reported on the financial statements for December 31, 2018 stating the appropriate classifications and amounts?

a. Income Statement: Sales Revenues ... $24,000,000; Warranty Expenses ... $2,280,000; and Balance Sheet: Non-Current Liability - Estimated Liability for Warranties ... $1,290,000.

b. Income Statement: Warranty Revenues ... $24,000,000; Warranty Expenses ... $2,280,000; and Balance Sheet: Current Liability - Estimated Liability for Warranties ... $1,290,000.

c. Income Statement: Sales Revenues ... $24,000,000; Warranty Expenses ... $990,000; and Balance Sheet: Current Liability - Warranties Payable ... $990,000.

d. Income Statement: Sales Revenues ... $24,000,000; Warranty Expenses ... $990,000; and Balance Sheet: Non-Current Liability - Estimated Liability for Warranties ... $1,290,000.

e. None of the above.

13] What would be the journal entry to record the sales of the BatKars and the warranty in 2018?

a. Cash ...... DR $24,000,000; Sales Revenue ...... CR $21,000,000; Warranty Payable ...... CR $3,000,000.

b. Cash ...... DR $24,000,000; Sales Revenue ...... CR $21,000,000; Unearned Warranty Revenue ...... CR $3,000,000.

c. Cash ...... DR $24,000,000; Sales Revenue ...... CR $21,000,000; Gain On Warranty ...... CR $3,000,000.

d. Cash ...... DR $24,000,000; Sales Revenue ...... CR $23,010,000; Warranty Payable ...... CR $990,000.

e. None of the above.

14] The journal entry to record the actual warranty costs incurred in 2018 would be

a. Warranty Expense ...... DR $990,000; Cash ...... CR $546,000; Parts Inventory ...... CR $444,000

b. Warranty Expense ...... DR $990,000; Warranty Payable ...... CR $990,000.

c. Warranty Expense ...... DR $990,000; Estimated Liability for Warranties ...... CR $990,000.

d. Warranty Revenues ...... DR $990,000; Cash ...... CR $546,000; Parts Inventory ...... CR $444,000.

e. Warranty Expense ...... DR $990,000; Direct Labor ...... CR $546,000; Parts Inventory ...... CR $444,000.

15] How would the warranty transactions be reported on the financial statements for December 31, 2018 stating the appropriate classifications and amounts?

a. Income Statement: Sales Revenue ...... $21,000,000; Warranty Revenue ...... $1,200,000; and Warranty Expenses ...... $990,000; and Balance Sheet: Current Liability - Estimated Liability for Warranties ...... $1,800,000.

b. Income Statement: Sales Revenue ...... $21,000,000; Warranty Revenue ...... $1,200,000; Warranty Expenses ...... $990,000; and Balance Sheet: Current Liability - Unearned warranty revenue ...... $1,800,000.

c. Income Statement: Sales Revenue ...... $21,000,000; Warranty Revenue ...... $1,200,000; Warranty Expenses ...... $990,000; and Balance Sheet: Non-Current Liability - Unearned warranty revenue ...... $1,800,000.

d. Income Statement: Sales Revenues ...... $24,000,000; Warranty Expenses ...... $1,200,000; and Balance Sheet: Current Liability - Unearned warranty revenue ...... $1,800,000.

Answer 1

Answers:-

10(c) warranty expense will be debited by $2,280,000[380*6000] and credited to Estimated Warranty Liabilities with the same amount

11(c)Estimated Warranty Liabilities will be debited with $990,000,the amount of actual cost incurred crediting Parts Inventory with $444,000 and Direct Labor with $546,000

12(a)Sales Revenues is  $24,000,000[4000*6000] Warranty Expenses ... $2,280,000[380*6000] and Balance Sheet: will show Non-Current Liability in the name of  Estimated Liability for Warranties ... $1,290,000[2,280,000-990,000]

13(b)Out of Cash received $24,000,000,Sales Revenue is $21,000,000[3500*6000] and Unearned Warranty Revenue is $3,000,000[500*6000]

14(e)expense incurred will be debited with proper apportionment into labour and inventory

15(c)Sales Revenue ...... $21,000,000, Warranty Revenue for the year 2018 $1,200,000[3,000,000*40%]Warranty Expenses are $990,000; and Balance Sheet will show Non-Current Liability as Unearned warranty revenue $1,800,000[3,000,000-1,200,000]