Reference no: EM13512415
Warranties, Accrual, and Cash Basis Alvarado Company sells a machine for $7,400 under a 12-month warranty agreement that requires the company to replace all defective parts and to provide the repair labor at no cost to the customers. With sales being made evenly throughout the year, the company sells 600 machines in 2010 (warranty expense is incurred half in 2010 and half in 2011). As a result of product testing, the company estimates that the warranty cost is $390 per machine ($170 parts and $220 labor). Assuming that actual warranty costs are incurred exactly as estimated, what journal entries would be made relative to the following facts?
(a) Under application of the expense warranty accrual method for:
(1) Sale of machinery in 2010.
(2) Warranty costs incurred in 2010.
(3) Warranty expense charged against 2010 revenues.
(4) Warranty costs incurred in 2011.
(b) Under application of the cash-basis method for:
(1) Sale of machinery in 2010.
(2) Warranty costs incurred in 2010.
(3) Warranty expense charged against 2010 revenues.
(4) Warranty costs incurred in 2011.
(c) What amount, if any, is disclosed in the balance sheet as a liability for future warranty costs as of December 31, 2010, under each method?
(d) Which method best reflects the income in 2010 and 2011 of Alvarado Company? Why?
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