Question

Listed below are a few transactions and events of Maxum Company. 1. Employees earn vacation pay at a rate of one day per month. During December, 23 employees qualify for one vacation day each. Their average daily wage is $160 per employee. 2. During December, Maxum Company sold 3,900 units of a product that carries a 60-day warranty. December sales for this product total $123,000. The company expects 7% of the units to need warranty repairs, and it estimates the average repair cost per unit will be $19. Prepare any necessary adjusting entries at December 31, 2013, for Maxum Company’s year-end financial statements for each of the above separate transactions and events.

Entry #1:Employees earn vacation pay at a rate of one day per month. During December, 23 employees qualify for one vacation day each. Their average daily wage is $160 per employee. Prepare the related adjusting entry.

Entry #2:During December, Maxum Company sold 3,900 units of a product that carries a 60-day warranty. December sales for this product total $123,000. The company expects 7% of the units to need warranty repairs, and it estimates the average repair cost per unit will be $19. Prepare the related adjusting entry

Answer 1

Maxum Company needs to record adjusting entries for accrued vacation pay and expected warranty repairs. The vacation pay adjusting entry is an expense of $3,680, and the warranty entry estimates a liability of $5,187 for future repairs.

Step-by-step explanation:

To prepare the necessary adjusting entries for Maxum Company's year-end financial statements, two separate events need to be recorded. For the first event involving vacation pay, Maxum Company would record the accrued vacation pay by debiting Vacation Expense and crediting Vacation Payable.

For the second event regarding the warranty, Maxum Company would recognize the expected future warranty expense and create a warranty liability by debiting Warranty Expense and crediting Warranty Liability.

Entry #1: Adjusting entry for vacation pay

Vacation Expense: 23 employees x 1 day each x $160/day = $3,680

• Debit Vacation Expense $3,680
• Credit Vacation Payable $3,680

Entry #2: Adjusting entry for warranty

Estimated warranty repairs: 3,900 units x 7% = 273 warranty repairs expected

Average repair cost per unit: $19

Total estimated warranty expense: 273 units x $19/unit = $5,187

• Debit Warranty Expense $5,187
• Credit Warranty Liability $5,187