Duane Herman Sells Exercise Machines for Home Use

question 37

Essay

Duane Herman sells exercise machines for home use. The machines carry a 4-year warranty. Past experience indicates that 6% of the units sold will be returned during the warranty period for repairs. The average cost of repairs under warranty is $45 for labour and $75 for parts per unit. During 2015, 2,500 exercise machines were sold at an average price of $800. During the year, 60 of the machines that were sold were repaired at the average price per unit. The opening balance in the Warranty Liability account is zero.
a. Prepare the journal entry to record the repairs made under warranty.
b. Prepare the journal entry to record the estimated warranty expense for the year. Determine the balance in the Warranty Liability account at the end of the year.

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Definitions:

Price Floor

A government-imposed minimum price charged on a product, below which that particular product cannot be supplied to the market.

Shortage

A scenario in which the market's need for a service or product surpasses its availability.

Surplus

An excess of production or supply over demand, often leading to lower prices or an inventory accumulation.

Price Ceiling

A government-imposed limit on how high a price is charged for a product, aimed at preventing prices from reaching levels deemed too high.