Arden’s Used Cars offers a one-year warranty from the date of sale on all cars. From historical data, Mr. Arden estimates that, on average, each car will require the company to incur warranty costs of $760. The following activities occurred during 2011:
a. Assume that the cars were sold for cash for an average of $9,500. Prepare the entry to record the car sales during 2011 (combine all the sales and make one entry).
b. Prepare the individual entries to record the warranty costs incurred. Assume that the breakdown of warranty costs is 40 percent wages (paid in cash) and 60 percent parts.
c. Arden accrues its warranty liability with a single adjusting entry at year-end. Prepare that entry.
d. Compute the year-end warranty liability. The beginning balance in the warranty liability account was $3,500.
e. Explain why accountants estimate the warranty expense in the year of sale instead of recording the expenses as the costs are incurred.
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