Required:

1. Prepare journal entries to summarize the sales and any aspects of the warranty for 2006.

2. What amount should Cap City report as a liability at December 31, 2006?

Answer:

Requirement 1:
Sales
Accounts receivable		6,000,000
Sales			6,000,000
Accrued liability and expense:
Warranty expense (4% x $6,000,000)		240,000
Estimated warranty liability			240,000
Actual expenditures:
Estimated warranty liability		29,000
Cash, parts, supplies, etc.			29,000
Requirement 2:
Estimated liability	$240,000
Actual Expenditures	(29,000	)
Balance Dec 31	$211,000

Learning Objective: 1 Level of Learning: 3

124. Sunnyvale Computer Company sells a line of computers that carry a 6-month warranty. Customers are offered the opportunity to buy a 2-year extended warranty for an additional charge. During 2006, Sunnyvale received $320,000 from customers for these extended warranties. All sales are on credit, and funds are received evenly throughout the year and go into effect immediately after purchase.

Required:

Prepare a summary journal entry to record sales of the extended warranties. Also prepare any other entries associated with the warranties that should be recorded during 2006.

Answer:

During 2006:
Accounts receivable	320,000
Unearned revenue-extended warranties		320,000
December 31, 2006 adjusting entry:
Unearned revenue-extended warranties	80,000
Extended warranties revenue		80,000
($320,000/2 yrs.) x 1/2 year

Learning Objective: 6 Level of Learning: 3

125. Stern Corporation borrowed $10 million cash on September 1, 2006, to provide additional working capital for the year's production. Stern issued a 6-month, 10% promissory note to Second State Bank. Interest on the note is payable at maturity. Each firm uses the calendar year as the fiscal year.