Telemix Company is engaged in the retail sale of high-definition televisions (HDTVs). Each HDTV has a 24-month warranty on parts. If a repair under warranty is required, a charge for the labor is made. Management has found that 20 percent of the HDTVs sold require some work before the warranty expires. Furthermore, the average cost of replacement parts has been $60 per repair. At the beginning of January, the account for the estimated liability for product warranties had a credit balance of $14,300. During January, 146 HDTV’s were returned under the warranty. The cost of the parts used in repairing the HDTVs was $8,760, and $ 9,442 was collected as service revenue for the labor involved. During January, the month before the Super Bowl, Telemix Company sold 450 new HDTVs.
1. Prepare entries in journal form to record each of the following:
(a) The warranty work completed during the month, including related revenue:
(b) The estimate liability for product warranties for HDTVs sold during the month.
2. Compute the balance of the Estimated Product Warranty Liability account at the end of the month.
3. If the company’s product warranty liability is overestimated, what are the effect on current and future years’ income?