Allowance method for warranties; reconstructing transactions. Assume that Central Appliance sells appliances, all for cash. It debits all acquisitions of appliances during a year to the Merchandise Inventory account. The company provides warranties on all its products, guaranteeing to make required repairs, within one year of the date of sale, for any of its appliances that break down. The company has many years of experience with its products and warranties.

The following table shows summary data and financial statement excerpts for Central Appliance for the end of 2007 and for some of the events during 2008. The firm made entries to the Warranty Liability account during 2008 as it made repairs, which converted the credit balance at the end of 2007 into a debit balance of $15,000 at the end of 2008 That is, before the firm makes its entry to recognize warranty expense for the entire year, the Warranty Liability account has a debit balance of $15,000. Also, the Merchandise Inventory account, to which the firm has debited all purchases of inventory, has a balance of $820,000 before the adjusting entry for Cost of Goods Sold, so that Goods Available for Sale totaled $820,000. Central Appliance makes its adjusting entries and closes its books only once each year, at the end of the year.

At the end of 2008, the management of Central Appliance analyzes the appliances sold within the preceding 12 months. It classifies all appliances still covered by warranty as follows: those sold on or before June 30 (more than six months old), those sold after June 30 but on or before November 30 (more than one month but less than six months old), and those sold on or after December 1. Assume that it estimates that one-half of 1% of the appliances sold more than six months ago will require repair, 5% of the appliances sold one to six months before the end of the year will require repair, and 8% of the appliances sold within the last month will require repair. From this analysis, management estimates that $5,000 of repairs will still have to be made in 2009 on the appliances sold in 2008. Items remaining in ending inventory on December 31, 2008, had cost S 120,000.
(a) What were the total acquisitions of merchandise inventory during 2008?
(b) What was the cost of goods sold for 2008?
(c) What was the dollar amount of repairs made during 2008?
(d) What was the warranty expense for 2008?
(e) Give journal entries for repairs made during 2008, for the warranty expense for 2008, and for cost of goods sold for2008.

Transcribed Image Text:

Balance Sheet Excerpts End of 2007 Merchandise Inventory... $ 100,000 All Other Asset Accounts 110,000 $ 210,000 $ 6,000 Total Assets .. Warranty Liability. AlL Other Liability and Shareholders' Equity Accounts 204,000 $ 210,000 Total Liabilities and Shareholders' Equity 2007 Income Statement Excerpts 2008 Sales Revenue .. $1,000,000 $800,000 Warranty Expense . 18,000