Merritt Equipment Company Sells Computers for $1,500 Each and Also

question 11

Essay

Merritt Equipment Company sells computers for $1,500 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 900 computers. Based on past experience, the company has estimated the total 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 $12,000 for parts and $18,000 for labor.
Instructions
(a) Under the expense warranty approach, give the entries to reflect the above transactions (accrual method) for 2014 and 2015.
(b) Under the cash-basis method, what are the Warranty Expense balances for 2014 and 2015?
(c) The transactions of part
(a) create what balance under current liabilities in the 2014 balance sheet?

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Definitions:

Tax Advantage

Financial benefits that accrue due to preferential tax treatment of certain investments or transactions.

Corporate Bond

A type of debt security issued by corporations to raise capital, where the corporation promises to repay the principal along with interest at a specified future date.

Municipal Bond

A debt security issued by municipalities to finance public projects, such as roads and schools, typically offering tax-free interest payments to investors.

U.S. Government Bond

A debt security issued by the United States Department of the Treasury to support government spending, considered a low-risk investment.