Purpose: (L.O. 1) This exercise will provide an example of how to account for the sale of a product that includes a warranty.
Colleen Mahla Company sells portable tables to be used for massage therapy. Each table has a built-in stereo system and carries a one-year warranty contract that requires the company to replace defective parts and to provide the necessary repair labor. During 2014, the company sold 300 tables at a unit price of $2,500. Sales occurred evenly throughout the year. The one-year warranty costs to repair defective tables are estimated to average $110 for parts and $130 for labor per unit. Approximately 10% of the tables sold are estimated to require warranty service. During 2014, the company's first year of operations, 11 units were submitted for warranty work at a total cost of $2,750.
(a) Record the adjusting journal entry at the end of 2014 to accrue the estimated warranty costs on the 2014 sales.
(b) Prepare the entry to record repair costs incurred in 2014 to honor warranty contracts on 2014 sales.
(c) Explain how all of the relevant amounts would be reflected on the financial statements prepared at the end of 2014.
(d) Why are warranty costs accrued in the period of sale? Explain.