On August 1, 2019, Pereira Corporation has sold 1,600 Wiglows to Mendez Company at $450 each. Mendez also purchased a 1-year service-type warranty on all the Wiglows for $12 per unit. In 2019, Pereira incurred warranty costs of $9,200. Costs for 2020 were $7,000. Required: 1. Prepare the journal entries for the preceding transactions. 2. Show how Pereira would report the items on the December 31, 2019, balance sheet.

Please refer to Explanation

Explanation:

1.

August 1,2019

DR Accounts Receivable - Mendez Company $739,200

CR Sales $720,000

CR Unearned Warranty Revenue $19,200

(To record Sales on Account to Mendez Company)

Dec 31, 2019

DR Warranty expense$9,200.00

CR Cash $9,200.00

(To record Warranty Expense incurred)

Dec 31, 2019

DR Unearned warranty revenue $8,000.00

CR Warranty revenue$8,000.00

(To record Warranty Revenue Earned)

Dec 31, 2020

DR Warranty expense $7,000.00

CR Cash$7,000.00

(To record Warranty Expense Incurred)

Dec 31 2020

DR Unearned warranty revenue $11,200.00

CR Warranty revenue $11,200.00

(To record Warranty Revenue Earned)

Workings

Sales

=1,600 wiglows * $450

= $720,000

Unearned Warranty Revenue - this is the amount that Mendez paid for a one year service-type warranty.

= 1,600 * 12

= $19,200

Warranty Revenue for 2019.

The warranty was for a year but only 5 months have passed at year's end since August 1 so the 5 months will be apportioned to enable it to be recorded for 2019, the total Unearned Warranty Revenue received will be apportioned as such,

= 5/12 * 19,200

= $8,000.

So $8,000 will be considered as earned for the year 2019.

Warranty Revenue 2020.

The rest of the Warranty will be recorded and earned in 2020.

= 19,200 - 8,000 (amount for 2019)

= $11,200

b)

The Unearned Warranty Revenue remaining will be reported as a Current liability as the period of a Year has not expired and so it cannot be considered as earned.

Dec 31 2019

Partial Balance Sheet.

Current Liabilities

Unearned warranty revenue $11,200.00

you will have $2593.74 in 10 years if you set aside $1,000 at 10%

you will have $9321.91 in 20 years if you set aside $2000 at 8%

you will have $1469.32 in 5 years if you set aside $1000 at 8%

you will have $1296.87 in 10 years if you set aside $500 at 10%

you will have $239.66 in 15 years if you set aside $100 at 6%

you will have $4660.96 in 20 years if you set aside $1000 at 8%

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