Arden’s Used Cars offers a one-year warranty from the date of sale on all cars. From historical data, Mr. Arden estimates that, on average, each car will require the company to incur warranty costs of $760. The following activities occurred during 2014:
1 February 2 Sold five cars
2 March 23 Sold ten cars
3 May 30 Incurred warranty costs of $3,000 in four cars sold in 2013
4 July 5 Sold eight cars
5 September 28 Incurred warranty costs of $5,000 on five cars sold in 2014
6 November 15 Incurred warranty costs of $6,000 on one car sold in 2014
7 December 20 Sold twelve cars
a. Assume that the cars were sold for cash $9,500 each. Show journal entries to record the sales.
b. Prepare the individual entries to record the actual warranty costs incurred. Assume that warranty costs are paid in cash.
c. Arden accrues its warranty liability with a single adjusting entry at year-end. Prepare that entry.
d. The beginning balance in the warranty liability account was $3,500. Show the warranty liability T-account, and compute the ending balance in the account.
e. Explain why accountants estimate the warranty expense in the year of sale instead of recording the expenses as the costs are actually incurred? Specifically, which two accounting principles is this treatment based on?