Problem NO: 5

Brooks Corporation sells computers under a 2-year warranty contract that requires the corporation to replace defective parts and to provide the necess

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 2014, 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.

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(For simplicity, assume that all sales occurred on December 31, 2014.) The warranty is not sold separately from the computer.

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Instructions

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(a) Record any necessary journal entries in 2014, applying the cash-basis method.

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(b) Record any necessary journal entries in 2014, applying the expense warranty accrual method.

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(c) What liability relative to these transactions would appear on the December 31, 2014, balance sheet and how would it be classified if the cash-basis method is applied?

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(d) What liability relative to these transactions would appear on the December 31, 2014, balance sheet and how would it be classified if the expense warranty accrual method is applied?

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In 2015, the actual warranty costs to Brooks Corporation were $21,400 for parts and $39,900 for labor.

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(e) Record any necessary journal entries in 2015, applying the cash-basis method.

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(f) Record any necessary journal entries in 2015, applying the expense warranty accrual method.

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