Accounting for Warranties
Response to the following problem:
Ainge Auto sells used cars and trucks. During 2009, it sold 53 cars and trucks for a total of $1,400,000. Ainge provides a 24-month, 30,000-mile warranty on the used cars and trucks sold. Ainge estimates that it will cost $25,000 in labor and $20,000 in parts to service (during the following year) the cars and trucks sold in 2009.
In January 2010, Joleen Glassett brought her truck in for warranty repairs. Ainge Auto fixed the truck under its warranty agreement. It cost Ainge $450 in labor and $310 in parts to fix Joleen Glassett's truck.
Prepare the journal entries to record
(1) Ainge Auto's estimated customer service liability as of December 31, 2009, and
(2) the costs incurred in repairing the truck in January 2010.