When do businesses record warranty expenses, and why?
Warranty expense is recorded at the time of making sales. It is recorded at the time of sales due to the matching principle.
A warranty is a kind of agreement that makes a guarantee against any defects in a company’s product. It is an expense for the company and a benefit for the customer. Warranty expense is related to the after-sale service.
Accounting for warranty expenses is based on the matching principle. Warranty expense is recorded at the time of making sales as warranty payable. This warranty expense is recorded based on estimation. When a company makes sales, it is estimated that some of its products would be claimed for warranty. Based on that estimation warranty expense is determined.
The income statement for California Communications follows. Assume California Communications signed a 3-month, 9%, $3,000 note on June 1, 2018, and that this was the only note payable for the company.
Year Ended July 31, 2018
Net Sales Revenue
Cost of Goods Sold
Total Operating Expenses
Other Income and (Expenses):
Total Other Income and (Expenses)
Net Income before Income Tax Expense
Income Tax Expense
1. Fill in the missing information for California’s year ended July 31, 2018, income statement. Round to the nearest dollar.
2. Compute the times-interest-earned ratio for the company. Round to two decimals.
Accounting treatment for contigencies
Analyze the following independent situations.
Determine how each contingency should be treated.
Liam Wallace is general manager of Moonwalk Salons. During 2018, Wallace worked for the company all year at a $13,400 monthly salary. He also earned a year-end bonus equal to 5% of his annual salary.
Wallace’s federal income tax withheld during 2018 was $2,010 per month, plus $1,608 on his bonus check. State income tax withheld came to $110 per month, plus $80 on the bonus. FICA tax was withheld on the annual earnings. Wallace authorized the following payroll deductions: Charity Fund contribution of 2% of total earnings and life insurance of $15 per month.
Moonwalk incurred payroll tax expense on Wallace for FICA tax. The company also paid state unemployment tax and federal unemployment tax.
1. Compute Wallace’s gross pay, payroll deductions, and net pay for the full year 2018. Round all amounts to the nearest dollar.
2. Compute Moonwalk’s total 2018 payroll tax expense for Wallace.
3. Make the journal entry to record Moonwalk’s expense for Wallace’s total earnings for the year, his payroll deductions, and net pay. Debit Salaries Expense and Bonus Expense as appropriate. Credit liability accounts for the payroll deductions and Cash for net pay. An explanation is not required.
4. Make the journal entry to record the accrual of Moonwalk’s payroll tax expense for Wallace’s total earnings.
5. Make the journal entry for the payment of the payroll withholdings and taxes.
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