E18-26 (L03) (Warranty Arrangement) On January 2, 2017, Grando Company sells production equipment to Fargo Inc. for $50,000. Grando includes a 2-year assurance warranty service with the sale of all its equipment. The customer receives and pays for the equipment on January 2, 2017. During 2017, Grando incurs costs related to warranties of $900. At December 31, 2017, Grando estimates that $650 of warranty costs will be incurred in the second year of the warranty. Instructions (a) Prepare the journal entry to record this transaction on January 2, 2017, and on December 31, 2017 (assuming financial statements are prepared on December 31, 2017). (b) Repeat the requirements for (a), assuming that in addition to the assurance warranty, Grando sold an extended war- ranty (service-type warranty) for an additional 2 years (2019-2020) for $800.

E18-26 (L03) (Warranty Arrangement) On January 2, 2017, Grando Company sells production equipment to Fargo Inc. for $50,000. Grando includes a 2-year assurance warranty service with the sale of all its equipment. The customer receives and pays for the equipment on January 2, 2017. During 2017, Grando incurs costs related to warranties of $900. At December 31, 2017, Grando estimates that $650 of warranty costs will be incurred in the second year of the warranty. Instructions (a) Prepare the journal entry to record this transaction on January 2, 2017, and on December 31, 2017 (assuming financial statements are prepared on December 31, 2017). (b) Repeat the requirements for (a), assuming that in addition to the assurance warranty, Grando sold an extended war- ranty (service-type warranty) for an additional 2 years (2019-2020) for $800.

Financial Accounting: The Impact on Decision Makers

10th Edition

ISBN:9781305654174

Author:Gary A. Porter, Curtis L. Norton

Publisher:Gary A. Porter, Curtis L. Norton

Chapter9: Current Liabilities, Contingencies, And The Time Value Of Money

Section: Chapter Questions

Problem 9.5P

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(Warranties) Brooks 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 2017, the corporation sellsfor cash 400 computers at a unit price of $2,500. On the basis of past experience, the 2-year warranty costs are estimated to be $155 for parts and $185 for labor per unit. (For simplicity, assume that all sales occurred on December 31, 2017.) The warranty is not sold separately from the computer.Instructions(a) Record any necessary journal entries in 2017.(b) What liability relative to these transactions would appear on the December 31, 2017, balance sheet and how would it be classified?(c) In 2018, the actual warranty costs to Brooks Corporation were $21,400 for parts and $39,900 for labor. Record any necessary journal entries in 2018.
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