Question

Stellar Corporation sells computers under a 2-year warranty contract that requires the corporation to replace defective parts and to provide the necessary repair labor. During 2020, the corporation sells for cash 395 computers at a unit price of $2,390. On the basis of past experience, the 2-year warranty costs are estimated to be $158 for parts and $208 for labor per unit. (For simplicity, assume that all sales occurred on December 31, 2017.) The warranty is not sold separately from the computer.
(a) Record any necessary journal entries in 2020.
(b) What liability relative to these transactions would appear on December 31, 2020, balance sheet and how would it be classified?
In 2021, the actual warranty costs to Stellar Corporation were $21,400 for parts and $39,900 for labor.
(c) Record any necessary journal entries in 2021.

Answer 1

Answer:

Journal Entries-2020  

DR Profit or Loss Provision for warranty(parts)  62,410.00  

CR Current Liabilities  62,410.00  

DR Profit or Loss Provision for Labour Costs  82,160.00  

CR Current Liabilities 82,160.00  

Journal Entries-2021  

CR Profit or Loss Provision for warranty(parts)  62,410.00  

DR Current Liabilities  62,410.00  

DR Profit or Loss Warranty costs  21,400.00  

CR Balance Sheet Warranty Payable/Bank  21,400.00  

 

CR Profit or Loss Provision for Labour Costs  82,160.00  

DR Current Liabilities  82,160.00  

DR Profit or Loss Warranty costs  39,900.00  

CR Balance Sheet Warranty Payable/Bank  39,900.00  

Explanation:

I posted the estimated provisions in the year 2020 for both parts and labour costs to profit or loss and credit current liabilities as appropriate.

However, upon receiving the actual figures in 2021, it is necessary that we reverse ealier year postings so as to record actual figures accordingly