Question $2$: Warrant Provisions $(10$ marks$)$

Calla Corp. sells equipment that comes with a two$-$year unlimited warranty on parts and labour for

repairs. All sales are cash sales. The warranty is intended to assure customers that the appliances

will operate as advertised. The warranty is expected to cost $2\%$ of sales in the first year and $4\%$ of

sales in the second year, for a total of $6\%.$ The provision for warranty has a credit balance of

$$189,000$ at the beginning of $20x5.$ The following events and decisions relate to the warranty:

$20$X$5$ Sales revenue of $$4,650,000$ was generated from products covered by the warranty. Both the

sale and the warranty provision must be recorded.

$20$X$5$ Warranty work consumed parts inventory with a cost of $$8,300,$ and labour of $$33,000.$ Labour

costs were paid in cash.

$20$X$6$ Sales revenue from products covered by the warranty were $$6,650,000.$ Both the sale and the

warranty provision must be recorded.

$20$X$6$ Warranty work consumed parts inventory with a cost of $$113,000,$ and labour of $$289,000.$

Labour costs were paid in cash.

$20$X$6$ Year$-$end review indicated that based on new information the percentage used as an estimate

for warranty work in $20$X$5$ and $20$X$6$ should have been a total of $9\%$ of sales, rather than $6\%.$

$20$X$6$ Because of a specific prevalent defect to a seal discovered during repairs in $20$X$6,$ the company

announced it would cover repairs for this specific defect for a third year for all sales of product

made in $20x5$ and $20$X$6.$ The cost of this work was estimated to be $1\mathrm{.}5\%$ of sales. This is in

addition to the percentage increase described. above. Products were re$-$engineered to eliminate

the defect starting in $20x7.$

Required:

Prepare journal entries for the events listed above. Because of uncertainty of estimates, no

discounting is to be applied.

Calculate the ending balance in the warranty provision account at the end of December $31,20$X$6$

$($show calculations for credit$).$ Merely showing an amount, whether right or wrong, will score a

zero grade