Accrued in the period of sale better matching if both

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Accrued in the period of sale (better matching), if both probable and reasonably estimated. 3. Warranty costs (continued) D. Warranty example: Dixie Company sold 500 machines for $900 each in 1999, its first year of operations. Each machine comes with a 12-month warranty agreement covering the full cost of both parts and labor. The company estimates that the warranty cost will average $50 per machine. In 1999, $10,000 of actual warranty repairs were made on the machines. Required 1. Under the cash basis method, prepare journal entries for the sale of machinery in 1999, actual warranty costs incurred in 1999, and warranty expense recognized in 1999. 2. Under the expense warranty accrual method, prepare journal entries for sale of machinery in 1999, actual warranty costs incurred in 1999, and warranty expense recognized in 1999. 3. Under the cash basis method, what amount of liability for future warranty costs would be disclosed in the 12/31/99 balance sheet? 4. Under the expense warranty accrual method, what amount of liability for future warranty costs would be disclosed in the 12/31/99 balance sheet? 5. Which method do you think best represents Dixon's income and current liabilities?
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1. Cash warranty method for Dixie a. To recognize sale of 500 machines @ $900 in 1999: Cash or receivables ...................... 45,000 Sales revenue ................................................ 45,000 b. To recognize warranty expense in 1999 for the $10,000 actual warranty costs incurred: Warranty expense ......................... 10,000 Cash, inventory, accrued payroll, etc ...... 10,000 c. To recognize estimated future warranty liability and expense related to 1999 sales: No journal entry. B. Accrual Warranty Method for Dixie: a. To recognize sale of 500 machines @ $900 in 1999: Cash or receivables ...................... 45,000 Sales revenue ................................................ 45,000 b. To recognize warranty expense in 1999 for the $10,000 actual warranty costs incurred: Warranty expense ......................... 10,000 Cash, inventory, accrued payroll, etc ...... 10,000 3. To recognize estimated future warranty liability and expense related to 1999 sales: Warranty expense .......................... 15,000 Estimated warranty liability ......................... 15,000 Alternatively, Dixie could have made the following journal entries instead of the above two entries: 2 (alternative). To recognize warranty expense in 1999 for the $10,000 actual warranty costs incurred: Estimated warranty liability .......... 10,000 Cash, inventory, accrued payroll, etc ...... 10,000
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3 (alternative). To recognize total estimated warranty liability and expense related to 1999 sales: Warranty expense .......................... 25,000 Estimated warranty liability ......................... 25,000 Estimated Warranty Liability in 12/31/99 B/S: Cash method Accrual method Est. warr. liab. $0 $15,000 Comparative 1999 I/S Items: Cash method Accrual method Revenues ................. $450,000 $450,000 Warranty expense < 10,000 > < 25,000 > Net $440,000 $425,000 The accrual method shows $15,000 more liabilities and $15,000 lower net income.
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