Reference no: EM132744591
Recall that Cookie Creations sells fine European mixers that it purchases from Kzinski Supply Company. Kzinski warrants the mixers to be free of defects in material and workmanship for 1 year from the date of original purchase. If the mixer has such a defect, Kzinski will repair or replace the mixer free of charge for parts and labor. The product must be shipped prepaid to an authorized Kzinski service center. The consumer pays the cost to ship the mixer. The cost to return the product to the consumer is paid by Kzinski.
The authorized service center is located in Boston. Because Cookie Creations values serving its customers, it pays the shipping to Boston for any mixers needing repair under Kzinski's warranty terms. Based on past experience, Kzinski has found that approximately 10% of mixers are returned for repair or replacement. The average cost to ship a mixer to Boston is $60.
The following transactions take place in 2020 and 2021.
- A total of 30 mixers are sold in 2020.
- Four of the mixers sold in 2020 are returned for repair in 2021. The total shipping cost for returning these four mixers to Boston is $210.
- A total of 40 mixers are sold in 2021.
Problem 1: Calculate Cookie Creations' warranty liability for the shipping costs at December 31, 2020.
Problem 2: Record the estimated warranty liability at December 31, 2020.
Problem 3: Prepare the summary journal entry (or entries) to record the shipment of the six mixers (four from the 2020 sales and two from the 2021 sales) for warranty repair in 2021.
Problem 4: Calculate Cookie Creations' warranty liability at December 31, 2021. (Hint: Note that there is no liability outstanding for the mixers sold in 2020. The 1-year warranty period has expired.)
Problem 5: Record the estimated warranty liability at December 31, 2021. (Hint: Similar to accounting for bad debts, consider any existing balance in the warranty liability account when in the preparation of the entry. You will find it helpful in the preparation of the general ledger account for the warranty liability and to post the above transactions.)