Question

Listed below are a few transactions and events of Maxum Company. Employees earn vacation pay at a rate of one day per month. Maxum estimated and must expense $8,740 of accrued vacation benefits for the year. During December, Maxum Company sold 4,500 units of a product that carries a 60-day warranty. December sales for this product total $130,000. The company expects 8% of the units to need warranty repairs, and it estimates the average repair cost per unit will be $17. Prepare adjusting entries at December 31 for Maxum Company’s year-end financial statements for each of the above separate transactions.

Answer 1

Answer:

Maxum Company Adjusting Entries

Debit Workers' Vacation Expense with $8,740

Credit Vacation Expense Payble with $8,740

To recognize workers' vacation expense for the year.

Debit Cash or Accounts Receivable with $130,000

Credit Sales Account with $130,000

To record sales for December.

Debit Warranty Repair Expense with $6,120

Credit Allowance for Warranty with $6,120

To record warranty of 8% on 4,500 units at $17 per unit

Explanation:

a) All costs payable for a period must be accrued whether paid or not.  This will match costs with revenue for the period.  This is in agreement with the matching principle and accrual concepts of GAAP.

b) Warranties are guarantees provided by the seller of a good.  It provides for repair or replacement if the good does not perform according to specifications.  It is part of the sales agreement and the cost should be provided for in the income statement.  This ensures correct matching of revenue and costs.

c) The warranty repair expense is calculated as follows:

4,500 x 8% x $17 = $6,120.

Answer 2

Answer:

Case 1.

Dr Vacation Benefit Expense $8,740

Cr Vacation Benefit Payable              $8,740

Case 2.

Dr Warranty Claim Expense $6,120

Cr             Provision for Warranty $6,120

Explanation:

Now here, we have two cases. The first case is related to the monthly benefits given to employees which will be accounted for according to the accrual basis. The second case is of the warranty which would be accounted for according to the International Accounting Standard IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

Case 1. The accrual basis says that the expense must recognized when it has been incurred. In the current scenario, the vacation benefits were promised so the firm must recognize $8,740 as an expense.

The entry would be:

Dr Vacation Benefit Expense $8,740

Cr Vacation Benefit Payable              $8,740

Now, the second case is the recording of the warranty claims expected which must be recognized as an expense. The warranty claim can be calculated as the number of units are 8% of total units sold during December which is 360 units (4,500 * 8%). Furthermore, the cost of maintenance per unit is $17 per unit which means the total cost of maintenance would be $6,120. So the entry would be recognizing provision for the warranty claim of $6,120 for the month.

The entry would be:

Dr Warranty Claim Expense $6,120

Cr             Provision for Warranty $6,120