Violeen Corporation (VC), a private Canadian company with a December 31 year end, applies ASPE in preparing its financial statements. During 2012, the following independent transactions and events took place:
1. VC sells a product that carries a three-year warranty. VC promises to fully replace the product if any problem is found with it within three years from the date of sale. Recent years indicate that the warranty costs amount to ½ % of sales in the year following sale, 1½% of sales in the second year and 3% of sales in the third year. VC sold $960,000 of this product and incurred costs of $29,500 in replacement products for customers during 2012. Outstanding warranty obligations reported at December 31, 2011 related to this product amounted to $42,600. VC uses the expense warranty method.
Required:
(a) Prepare all entries required during 2012.
(b) Identify clearly the Warranty Expense reported on the 2012 income statement, and the amount of the Warranty Liability reported on the December 31, 2012 balance sheet.
(c) Now assume that VC uses the revenue approach because the warranty can be sold separately. In 2012, $60,000 of the $960,000 sales can be attributed to warranties and the total expected warranty costs over the three years are estimated to be $48,000. Assuming that 8% of the total expected warranties related to 2012 sales came back for replacement in 2012, prepare all entries required during 2012 for the 2012 warranties.