Question

marinamarina Boats guarantees its boats for three years or 1,500 hours, whichever comes first. Industry experience indicates that MarinaMarina can expect warranty costs will equal 9 percent of sales. Assume in its first year,MarinaMarina Boats had sales totaling $494,000 ,receiving cash for 22 percent of sales and notes receivable for the remainder. Warranty payments totaled $20,800

during the year.

1.	Record the sales, warranty expense, and warranty payments for MarinaMarina Boats. Ignore cost of goods sold.
2.	Post relevant portions of the journal entries to the Estimated warranty payable T-account. At the end of the first year, how much in estimated warranty payable does MarinaMarina owe its customers?
3.	What amount of warranty expense will MarinaMarina report during its first year of operations? Does the warranty expense for the year equal the year's cash payments for warranties? Which accounting principle addresses this situation?

Answer 1

Solution 1:

Journal Entries - Marina Boats
Event	Particulars	Debit	Credit
a	Cash Dr	$108,680.00
	Note receivables Dr	$385,320.00
	To Sales revenue		$494,000.00
	(To record sales revenue)
b	Warranty expense Dr ($494,000*9%)	$44,460.00
	To Estimated warranty payable		$44,460.00
	(To record warranty provision)
c	Estimated warranty payable Dr	$20,800.00
	To Cash		$20,800.00
	(To record warranty payments)

Solution 2:

Estimated Warranty Payable
Particulars	Debit	Particulars	Credit
Cash	$20,800.00	Warranty expense	$44,460.00
Ending balance	$23,660.00
Total	$44,460.00	Total	$44,460.00

At the end of the first year, estimated warranty payable Marina owe its customers = $23,660

Solution 3:

Marina will report warranty expense of $44,460 during first year of its operation. No, warranty expense for the year higher than year's cash payments for warranties. Matching accounting principle addresses this situation.