Brooks Corporation sells portable computer equipment with a two-year warranty contract that requires the corporation to replace defective parts and provide the necessary repair labour. During 2011, the corporation sells for cash 400 computers at a unit price of $2,500. Based on experience, the two-year warranty costs are estimated to be $155 for parts and $185 for labour per unit. (For simplicity, assume that all sales occurred on December 31, 2011.) The warranty is not sold separately from the equipment, and no portion of the sales price is allocated to warranty sales.
Instructions
Answer (a) to (d) based on the information above.
(a) Record the 2011 journal entries, assuming the cash basis is used to account for the warranties.
(b) Record the 2011 journal entries, assuming the accrual basis expense approach is used to account for the warranties.
(c) What liability relative to these transactions would appear on the December 31, 2011 balance sheet and how would it be classified if the cash basis is used?
(d) What liability relative to these transactions would appear on the December 31, 2011 balance sheet and how would it be classified if the accrual basis expense approach is used? Answer (e) to (h) assuming that in 2012 the actual warranty costs incurred by Brooks Corporation were $21,400 for parts and $39,900 for labour.
(e) Record the necessary entries in 2012, applying the cash basis.
(f) Record the necessary entries in 2012, applying the accrual basis expense approach.
(g) Which method would you recommend to the company? Why?
(h) Assume that the warranty costs incurred by Brooks Corporation in 2013 were substantially higher than estimated.
How would the company deal with the discrepancy between the estimated warranty liability and the actual warranty expense?