Merritt Equipment Company sells computers for $1,220 each and also gives each customer a 2-year warranty that requires the company to perform periodic services and to replace defective parts. During 2017, the company sold 950 computers. Based on past experience, the company has estimated the total 2-year warranty costs as $40 for parts and $60 for labor. (Assume sales all occur at December 31, 2017.)

The journal entries are shown below:

1. Accounts Receivable A/c Dr $1,159,000 (950 computers * $1,220)

To Sales Revenue A/c 1,159,000

(Being the sales is recorded)

2. Warranty expense A/c Dr $95,000

To Warranty liability A/c $95,000

(Being the warranty expense is recorded)

The warranty expense would be

= 950 computers * $40 + $60

= 950 computers * $100

= $95,000

3. Warranty liability A/c Dr $26,000

To Inventory A/c Dr $10,400

To Accrued payroll A/c $15,600

(Being warranty liability is recorded)