Accounting for Warranties
Response to the following problem:
Rick Procter, president of Sharp Television Stores, has been concerned recently about declining sales due to increased competition in the area. Rick has noticed that many of the national stores selling television sets and appliances have been placing heavy emphasis on warranties in their marketing programs. In an effort to revitalize sales, Rick has decided to offer free service and repairs for one year as a warranty on his television sets. Based on experience, Rick believes that first-year service and repair costs on the television sets will be approximately 5% of sales. The first month of operations following the initiation of Rick's new marketing plan showed significant increases in sales of TV sets. Total sales of TV sets for the first three months under the warranty plan were $10,000, $8,000, and $12,000, respectively.
1. Assuming that Rick prepares adjusting entries and financial statements for his own use at the end of each month, prepare the appropriate entry to recognize customer service (warranty) expense for each of these first three months.
2. Prepare the appropriate entry to record services provided to repair sets under warranty in the second month, assuming that the following costs were incurred: labor (paid in cash), $550; supplies, $330.