1. Warranties, Accrual, and Cash Basis Brooks Corporation sells computers under a 2-year warranty contract that requires the corporation to replace defective parts and to provide the necessary repair labor. During 2010 the corporation sells for cash 400 computers at a unit price of $2,500. On the basis of past experience, the 2-year warranty costs are estimated to be $155 for parts and $185 for labor per unit. (For simplicity, assume that all sales occurred on December 31, 2010.) The warranty is not sold separately from the computer.
(a) Record any necessary journal entries in 2010, applying the cash-basis method.
(b) Record any necessary journal entries in 2010, applying the expense warranty accrual method.
(c) What liability relative to these transactions would appear on the December 31, 2010, balance sheet and how would it be classified if the cash-basis method is applied?
(d) What liability relative to these transactions would appear on the December 31, 2010, balance sheet and how would it be classified if the expense warranty accrual method is applied? In 2011 the actual warranty costs to Brooks Corporation were $21,400 for parts and $39,900 for labor.
(e) Record any necessary journal entries in 2011, applying the cash-basis method.
(f) Record any necessary journal entries in 2011, applying the expense warranty accrual method.