Employees earn vacation pay at a rate of one day per month. Maxum estimated and must expense $5,890 of accrued vacation benefits for the year.
2. During December, Maxum Company sold 3,500 units of a product that carries a 60-day warranty. December sales for this product total $124,000. The company expects 10% of the units to need warranty repairs, and it estimates the average repair cost per unit will be $15.
Prepare adjusting entries at December 31 for Maxum Company's year-end financial statements for each of the above separate transactions.
Answer (1)
Record accrued vacation benefits by debiting Vacation Benefits Expense and crediting Accrued Vacation Benefits for $5 , 890 .
Calculate the estimated number of units needing warranty repair: 3 , 500 × 0.10 = 350 units.
Calculate the total estimated warranty cost: 350 × $15 = $5 , 250 .
Record estimated warranty costs by debiting Warranty Expense and crediting Estimated Warranty Liability for $5 , 250 . $5 , 250
Explanation
Understanding the Transactions We need to prepare adjusting entries for two separate transactions. The first involves accrued vacation benefits, and the second involves estimated warranty costs.
Adjusting Entry for Vacation Benefits For the first transaction, Maxum estimated and must expense $5,890 of accrued vacation benefits for the year. This means we need to recognize this expense and the corresponding liability. We will debit Vacation Benefits Expense and credit Accrued Vacation Benefits for $5,890.
Calculating Estimated Units for Warranty For the second transaction, Maxum sold 3,500 units with a 60-day warranty. They expect 10% of the units to need warranty repairs, and the average repair cost is $15 per unit. First, we calculate the estimated number of units needing repair: 3 , 500 units × 10% = 350 units .
Calculating Total Estimated Warranty Cost Next, we calculate the total estimated warranty cost: 350 units × $15/ unit = $5 , 250.
Adjusting Entry for Warranty Costs For the second transaction, we will debit Warranty Expense and credit Estimated Warranty Liability for $5,250 to reflect the estimated cost of future warranty repairs.
Final Adjusting Entries In summary, the adjusting entries are:
Debit Vacation Benefits Expense and credit Accrued Vacation Benefits for $5,890.
Debit Warranty Expense and credit Estimated Warranty Liability for $5,250.
Examples
Understanding and accounting for estimated liabilities like vacation pay and warranty costs is crucial for businesses. For example, a car manufacturer needs to estimate warranty claims to accurately reflect potential future expenses. Similarly, a software company offering customer support needs to account for the cost of providing that support. By properly estimating and accounting for these liabilities, companies can present a more accurate financial picture to investors and stakeholders, ensuring transparency and sound financial management.
