On December 31, 2020, Sheffield Company sells equipment to Tabor Inc. for $126,400. Sheffield includes a 1-year assurance warranty service with the sale of all its equipment. The customer receives and pays for the equipment on December 31, 2020. Sheffield estimates the prices to be $123,000 for the equipment and $3,400 for the cost of the warranty.

Required:

1. Prepare the journal entry to record this transaction on December 31, 2020.

Cash or Bank A/c Dr $126,400

Warranty Expense A/c Dr $3,400

To Warranty Liability A/c $3,400

To Equipment A/c $126,400

(Being the cash is recognized)

Explanation:

The journal entry is shown below:

Cash or Bank A/c Dr $126,400

Warranty Expense A/c Dr $3,400

To Warranty Liability A/c $3,400

To Equipment A/c $126,400

(Being the cash is recognized)

For recording this we debited the cash and warranty expense as it increased the assets and the expenses account and credited the warranty liability and equipment because it reduced the assets and increased the liabilities