Cyrus Equipment Company sells computers for $1,500 each (all cash sales) and also gives each customer a 2-year warranty that requires the company to perform periodic services and to replace defective parts. During 2012, the company sold 900 computers. Based on past experience, the company has estimated the total 2-year warranty costs as $40 for parts and $60 for labor for each computer. Assume that all sales occurred on December 31, 2012. In 2013, Cyrus incurred actual warranty costs relative to 2012 computer sales of $25,000 for parts and $48,000 for labor. When incurring costs to service computers, the account credited is titled “Cash, Materials, and Overhead.”
(a) Under the expense warranty approach, give the entries to reflect the above transactions (accrual method) for 2012 and 2013. Omit journal entry explanations.
(b) Under the cash-basis method, what are the Warranty Liability balances related to these computers for 2012 and 2013?
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