Merritt Equipment Company sells computers for $1,620 each and also gives each customer a 2-year warranty that requires the company to perform periodic services and to replace defective parts. During 2014, the company sold 860 computers on credit. Based on past experience, the company has estimated the per unit 2-year warranty costs as $40 for parts and $60 for labor. (Assume sales all occur at December 31, 2014.) In 2015, Merritt incurred actual warranty costs relative to 2014 computer sales of $13,200 for parts and $19,800 for labor.(Assume sales all occur at December 31, 2014.)
In 2015, Merritt incurred actual warranty costs relative to 2014 computer sales of $13,200 for parts and $19,800 for labor.
1. Under the expense warranty approach, give the entries to reflect the above transactions (accrual method) for 2014 and 2015.
2. Under the cash-basis method, what are the Warranty Expense balances for 2014 and 2015?
3. The transactions of part (a) create what balance under current liabilities in the 2014 balance sheet?
Current Liabilities-Warranty Liability