Reference no: EM132360106

Question

(Part A)

Fairchild Technologies Corp. prepares monthly income statements. However, the company counts its inventory only at year end (December 31) and uses a periodic inventory system. Thus, Fairchild estimates interim month-end inventories using the gross profit method. All sales are made "on account" (i.e., "on credit"). The company's rate of gross profit on sales has consistently been 20%. The following information relates to the month of January 20X2:

Accounts receivable, December 31, 20X1 $21,000 Accounts receivable, January 31, 20X2 27,000 Collections on accounts during January 20X2 90,000 Inventory, December 31, 20X145,000 Purchases during January 20X258,000

In the (MS Excel file), compute the estimated cost of inventory that Fairchild should report in its January 31, 20X2 balance sheet. Begin by using the information provided above to compute sales for the month of January 20X2.

(Part B)

In January 20X2, Fairchild introduced a new product carrying a two-year warranty. Management estimated that warranty costs for the product will equal 8% of sales, as follows:

5% of sales during the first 12 months following sale, and

An additional 3% of sales in the second 12 months following sale

Fairchild's records show:

Sales of the new product totaled $60,000 during January 20X2.

Actual warranty expenditures related to the new product totaled $1,100 during January.

In the (MS Excel file), compute the estimated warranty liability that Fairchild will report in its January 31, 20X2 balance sheet related to the new product. No journal entries are required. Label all amounts clearly, showing your computations in good form.