Q11SE - Horngren'S Financial And Managerial Accounting

Question

Runner guarantees its snowmobiles for three years. Company experience indicates that warranty costs will be approximately 5% of sales. Assume that the Trail Runner dealer in Colorado Springs made sales totaling \(600,000 during 2018. The company received cash for 20% of the sales and notes receivable forthe remainder. Warranty payments totaled \)10,000 during 2018.

Requirements

Record the sales, warranty expense, and warranty payments for the company.

Ignore cost of goods sold.

Step-by-Step Solution

Answer

Answer                 

 

Date	Accounts and Explanation	Debit	Credit
	Cash  Accounts receivable       Sales revenue  (To record sales)	$ 120,000 $480,000	$600,000
	Warranty expense          Warranty payable  (To record warranty liability)	$30,000	$30,000
	Warranty payable         Cash  (To record warranty related expenses)	$10,000	$10,000

Step-by-step solution

Step 1: Meaning of Accounts receivable, Warranty expense.

 Accounts receivable (AR) is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers.

Warranty expense is the cost that a business expects to or has already incurred for the repair or replacement of goods that it has sold.

Step 2: Calculation for Cash received and Accounts receivable

$$\begin{gathered} \mathrm{Cash} \mathrm{Received} = \mathrm{Sales} \times 20\% \mathrm{of} \mathrm{Sales} \\ =\$6,00,000 \times \frac{20}{100} \\ =\$1,20,000 \\ \mathrm{Accounts} \mathrm{receivable} = \mathrm{Sales} \times 80\% \mathrm{of} \mathrm{sales} \\ =\$6,00,000 \times \frac{80}{100} \\ = \$ 4,80,000 \end{gathered}$$

Step 3: Explanation of the journal entry

• To record sales, Cash is debited by $ 120,000, Accounts receivable is debited $ 480,000 and Sales revenue is credited by $ 600,000.

 

• To record warranty liability, Warranty expense is debited and Warranty payable is credited with an amount of $ 30,000.
• To record warranty related expenses, Warranty payable is debited and Cash is credited with an amount of $ 10,000.