Problem 3-1

1. EXPENSE AS INCURRED APPROACH

2020 Cash 4,500,000

Sales 4,500,000

Warranty Expense 40,000

Cash 40,000

2021 Cash 7,500,000

Sales 7,500,000

Warranty Expense 150,000

Cash 150,000

2. ACCRUAL APPROACH

2020 Cash (15,000x300) 4,500,000

Sales 4,500,000

Warranty Expense (60% x 300 x 800) 144,000

Estimated warranty liability 144,000

Estimated warranty Liability 150,000

Cash 150,000

3
Warranty Expense 2020 144,000
Warranty Expense 2021 240,000
Total 384,000
Actual Warranty payments 2020 40,000
Actual Warranty payments 2021 150,000 190,000
Estimated Warranty Liability 194,000

4
2020 First Contract year of 1/1/2020 sales 24000
First Contract year of 7/1/2020 sales 12000
2021 First Contract year of 7/1/2020 sales 12000
Second Contract year of 1/1/2020 sales 48000
Second Contract year of 7/1/2020 sales 24000
2022 Second Contract year of 7/1/2020 sales 24000
Warranty Expense for 2020 144000

Warranty Expense related to 2021 sales

 2021 First contract year of 1/1/2021 sales 40000
First contract year of 7/1/2021 sales 20000
2022 First contract year of 7/1/2021 sales 20000
Second contract year of 1/1/2021 sales 80000
Second contract year of 7/1/2021 sales 40000
2023 Second contract year of 7/1/2021 sales 40000
Warranty Expense 2021 240000

5
2020 sales still under warranty after 12/31/21:
Second contract year of 7/1/2020 sales 24000
2021 sales still under warranty after 012/31/21:
First contract year of 7/1/2021 sales 20000
Second contract year of 1/1/2021 sales 80000
Second contract year of 7/1/2021 sales 80000
Estimated Warranty liability 12/31/2021 204000
Estimated warranty liability per book 194,000
Increase in warranty liability 10,000

Warranty Expense 10,000

Estimated warranty Liability 10,000
 Problem 3-7
1
2020 Cash 2,943,000
Sales 2,700,000
Unearned Warranty Revenue 243,000

2021 Unearned Warranty 81,000

Warranty Revenue 81,000

Warranty Expense 60,000

Inventory 20,000
Cash 40,000

2
Current Liabilities:
Unearned Warranty Revenue 81,000

Non Currrent Liabilities:

Unearned Warranty Revenue 81,000
 Problem 3- 14
Warranty Liability before adjustment 100,000
Warranty Liability after adjustment 540,000
Total Warranty Liability 640,000
Divided by: Estimated Warranty Expense 8%
Net Sales 8000000 A
 Problem 3- 15

1 2020 sales 5,000,000

Multiply by 7%
Warranty Expense 2020 350000 A

2 Warranty Expense 2020 350,000

warranty cost 2020 100,000
Warranty liability 12/31/2020 250,000 B

3 2021 sales 7,000,000

Multiply by 7%
Warranty Expense 2021 490000 C

4 Warranty liability 12/31/2020 250,000

Warranty expense 2021 490,000
Total 740,000
Less: Warranty Cost 2021 300,000
Warranty liability 12/31/2021 440,000 B