Question

Soundgarden Company sold 200 color laser copiers on July 10, 2020, for $4,000 apiece, together with a 1-year warranty. Maintenance on each copier during the warranty period is estimated to be $330. Prepare entries to record the sale of the copiers, the related warranty costs, and any accrual on December 31, 2020. Actual warranty costs (inventory) incurred in 2020 were $17,000. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.

Answer 1

Answer:

Soundgarden Company

Journal Entries:

July 10, 2020:

Debit Cash Account (or Accounts Receivable) $800,000

Credit Sales Revenue $800,000

To record the sale of 200 copiers at $4,000 apiece.

July 10, 2020:

Debit Warranty Expense $66,000

Credit Warranty Liability $66,000

To record the estimated warranty maintenance on copiers sold.

December 31:

Debit Warranty Liability $17,000

Credit Inventory $17,000

To record actual warranty costs incurred.

Explanation:

Soundgarden should record these transactions according to the matching principle, whereby warranty expense is recognized in the period that matches the sale so that all expenses related to sales are recognized when the sales are recognized.  This is achieved by creating a warranty liability account after the sales and recording a warranty expense as the debit entry.  When actual warranty costs are incurred, the Soundgarden Company will debit the warranty liability and credit the inventory actual for the actual costs.