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Warranty_Problem_2

# Warranty_Problem_2 - \$76,000 C Estimated Warranty Liability...

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Warranty Problem & Solution 2 Ninja, Inc. estimates warranty costs as a percentage of sales as follows: Year of Sale 2% First Year after Sale 3.5% Second Year after Sale 3% Third Year after Sale 1.5% Sales in 2001 were \$1,000,000 while sales in 2002 were \$1,200,000. Actual warranty cost incurred in 2001 was \$24,000 while the actual warranty cost incurred in 2002 was \$66,000. Of this \$66,000, \$30,000 was related to sales in 2001 while \$36,000 was related to sales in 2002. A. Record the actual warranty cost incurred in 2001. B. Provide any necessary adjusting entry as of 12/31/01 C. Record the actual warranty cost incurred in 2002. D.1 Assuming an income statement approach, record any necessary adjusting entry as of 12/31/02 D.2 Assuming a balance sheet approach, record any necessary adjusting entry as of 12/31/02. A. Warranty Expense \$24,000 Cash/Wages Payable/Inventory/etc. \$24,000 B. Warranty Expense \$76,000 = (\$1,000,000 @ 10%) - \$24,000 Estimated Warranty Liability
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Unformatted text preview: \$76,000 C. Estimated Warranty Liability \$66,000 Cash/Wages Payable/Inventory/etc. \$66,000 (There are alternative correct answers; the answer affects the following two answers) D.1. Warranty Expense \$120,000 = (\$1,200,000 @ 10%) Estimated Warranty Liability \$120,000 D.2. Warranty Expense \$120,000 Estimated Warranty Liability \$120,000 2001 \$1,000,000 @ 10% \$100,000 2002 \$1,200,000 @ 10% \$120,000 Total Estimated Warranty Costs \$220,000 Costs Incurred to Date (\$ 90,000) Required Balance in Liability \$130,000 Current Balance in Liability (\$ 10,000) = \$76,000 - \$66,000 Required Adjustment \$120,000 If you chose an alternative answer for “C,” answers to D1 and D2 will not be \$120,000. If you debited Warranty Expense for \$66,000 in “C,” then the number should be \$54,000. If you split them, debiting Warranty Expense for \$36,000 and Est. Warranty Liab. for \$30,00, then the correct amount is \$84,000....
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