Question

During 2019 Canada Computer Company sold computers for $100,000 which includes a 2-year warranty. Warranties sold separately for $70,000 that requires the company to perform periodic services and to replace defective parts. In 2020, Canada Computer Company incurred actual warranty costs relative to 2019 computer sales of $5,000 for parts and $12,000 for labor.                                                                                            

Instructions

(a) Using the revenue warranty approach, prepare the entries to reflect the above transactions for 2019 and 2020. assuming Canada co. earn any unearned warranties equally over warranty life.

(b) The transactions of part (a) create what balance under current liabilities in the Dec 31, 2019 balance sheet?

Answer 1

Journal Enteries under warranty Appraoch
Year	Particulars		Debit	Credit
31-03-2019	Debtors A/c	DR	1,00,000.00
	To Sales A/c	CR		1,00,000.00
	(Being computers have been sold)
Year	Particulars		Debit	Credit
31-03-2019	Warranty Expense a/c	DR	70,000.00
	To warranty liability A/c	CR		70,000.00
	(Being warranty liability accrued for 2 years recognised)
Year	Particulars		Debit	Credit
31-03-2020	warranty liability A/c	DR	17,000.00
	To Inventory A/c	CR		5,000.00
	To wages a/c			12,000.00
	(Being expensed)
Balance sheet extract
Particulars	Amount
Current liabilities	35,000.00
Non current Liabilities	35,000.00