Better Buy Ltd. sells notebook computers, that come with a 90-day manufacturer's warranty, as well as extended warranties. On July 1, 2021, Better Buy sold a notebook with a two-year extended warranty contract. The extended warranty coverage started on October 1", after the 90-day manufacturer's warranty on the notebook expired. The customer paid $1,500 cash for this special offer. The customer was not obliged to purchase the extended warranty with the notebook, so two performance obligations have been identified. The stand-alone selling price of the computer is $1,400 (cost to Better Buys Ltd. was $700). The stand-alone value of the two-year extended warranty is $240 if purchased and paid for today. Assume the costs to provide the warranty are incurred fairly evenly throughout the two-year period. The customer takes the computer home on July 1, 2021. Better Buys Ltd. has a December 31 year end and prepares financial statements annually. Required: (a) How much of the $1,500 revenue will be recorded in each year (2021 through to 2023)? Show all calculations and label all amounts. (Round to the nearest dollar.) (b) Prepare all of the journal entries to record the above transaction for 2021 and 2022.

Better Buy Ltd. sells notebook computers, that come with a 90-day manufacturer's warranty, as well as extended warranties. On July 1, 2021, Better Buy sold a notebook with a two-year extended warranty contract. The extended warranty coverage started on October 1", after the 90-day manufacturer's warranty on the notebook expired. The customer paid $1,500 cash for this special offer. The customer was not obliged to purchase the extended warranty with the notebook, so two performance obligations have been identified. The stand-alone selling price of the computer is $1,400 (cost to Better Buys Ltd. was $700). The stand-alone value of the two-year extended warranty is $240 if purchased and paid for today. Assume the costs to provide the warranty are incurred fairly evenly throughout the two-year period. The customer takes the computer home on July 1, 2021. Better Buys Ltd. has a December 31 year end and prepares financial statements annually. Required: (a) How much of the $1,500 revenue will be recorded in each year (2021 through to 2023)? Show all calculations and label all amounts. (Round to the nearest dollar.) (b) Prepare all of the journal entries to record the above transaction for 2021 and 2022.

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter22: Accounting For Changes And Errors.

Section: Chapter Questions

Problem 10E

See similar textbooks

Similar questions

Extravagant Company, which uses IFRS, sells home appliances. On January 1, 2024, it sells a fridge to a customer for $5,300 cash and, as part of a promotion, Extravagant gives the customer a free 15- month extended warranty (service-type warranty). The fridge also has a 9-month assurance-type warranty, which is estimated to cost Extravagant 4% of sales revenue. Assume that the 15-month extended warranty begins after the 9-month assurance-type warranty has expired, so the customer effectively receives 24 months of warranty coverage. Additional information follows: (a) The fridge, if sold by itself, would normally sell for $5,100. The cost of the fridge to Extravagant, based on a first-in first-out (FIFO) perpetual inventory system, is $1,900. (b) The extended warranty, if sold by itself, would normally sell for $1,275. Required: (A) Prepare the journal entry/entries that should be recorded on January 1, 2024. (B) How much Operating Income would be reported by Extravagant for the…
Cullumber Ltd. sells computers, computer accessories, and software. On its computer sales, the company provides a one-month warranty that is included in the cost of the computer. Claims under the warranties vary from replacing defective items to providing customers with refunds if they choose. During 2024, the estimated costs related to the one-month warranties was $52,000, of whic $46,800 had been incurred before year end ($39,000 for replacement items and $7,800 in refunds). For an additional charge of $130, Computers Galore also offers extended warranty coverage for two years on its computers. This amount is expected to cover the costs associated with the extended warranties. During 2024, Computers Galore sold 1,040 two-ye warranties. The costs incurred during the year for replacements under these warranties amounted to $40,300. Based on experienc the company estimates that its total warranty costs over the two-year coverage period will be $78,000, which it expects will occur evenly…
During 2020, Beautiful Company introduced a fully automatic washing machine with dryer. The sales price per unit that comes with warranty is P40,000. The company offers a three-year warranty against defects and provides service other than the agreed-upon specifications. In addition, the customers are given the option to purchase the warranty separately. If the customer opted not to buy the warranty, the washing machine with dryer is sold for P37,500. The following are the sales data (see image below).Beautiful estimates that of the total pesos spent for repairs in the warranty contracts, 20% is incurred evenly during the first warranty year, 30% evenly in the second warranty year and 50% evenly during the third warranty year. Cost of servicing the units during 2020 and 2021 were P150,000 and P300,000 respectively.How much is the Unearned Revenue from Warranty Contracts at December 31, 2021?
Carnes Electronics sells consumer electronics that carry a 90-day manufacturer’s warranty. At the time of purchase, customers are offered the opportunity to also buy a two-year extended warranty for an additional charge. During the year, Carnes received $412,000 for these extended warranties (approximately evenly throughout the year). Required: 1. Does this situation represent a loss contingency? Why or why not? How should it be accounted for? 2. Prepare journal entries that summarize sales of the extended warranties (assume all credit sales) and any aspects of the warranty that should be recorded during the year.
Star Wars Computers manufactures and sells pagers and radio paging systems which include a 6-month warranty on product defects. It also sells an extended warranty which provides an additional two years of protection beyond the 6-month warranty. On July 1, 2024, it sold a paging system for $4,500 and an extended warranty for another $1,400. The customer paid for the entire transaction with cash. The journal entry to record this transaction would include:
Chips Co. sells televisions at an average price of P 7,500 and also offers to each customer a separate 3-year warranty contract for P 750 that requires the company to perform periodic services and to replace defective parts. During 2021, the company sold 300 televisions and 270 warranty costs of P 200 for parts and P 400 for labor and accounts for warranties separately. Assume sales occurred on Dec. 31, 2021, income is recognized on the warranties, and straight line recognition of warranty revenues occcurs. What amount of current and non- current liability relative to warranty revenue would appear on the Dec. 31, 2021 statement of financial position, respectively?
Pronghorn Corp. provides at no extra charge a two-year warranty with one of its products, which was first sold in 2020. In that year, Pronghorn sold products for $2.14 million and spent $68,900 servicing warranty claims. At year end, Pronghorn estimates that an additional $520,800 will be spent in the future to service warranty claims related to the 2020 sales. Prepare entries for the warranty that recognize the sale as a multiple deliverable with the warranty as a separate service that Pronghorn bundled with the selling price of the product. Ignore any cost of goods sold entry. Sales in 2020 occurred evenly throughout the year. Warranty agreements similar to this are available separately, are estimated to have a stand-alone value of $619,900, and are earned over the warranty period as follows: 2020-25%, 2021-50%, and 2022-25%. Also prepare the entries to record the $68,900 expenditure for servicing the warranty during 2020, and the adjusting entry required at year end, if any, under…
Skysong Factory provides a 2-year warranty with one of its products which was first sold in 2025. Skysong sold $997,500 of products subject to the warranty. Skysong expects $120,250 of warranty costs over the next 2 years. In that year, Skysong spent $71,080 servicing warranty claims. Prepare Skysong's journal entry to record the sales (ignore cost of goods sold) and the December 31 adjusting entry, assuming the expenditures are inventory costs. (If no entry is required, select "No Entry" for the account titles and enter O for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually. List all debit entries before credit entries.) Date During 2025 12/31/25 Account Titles and Explanation (To record payment for warranty costs incurred) (To record sales) Debit Credit 1
Star Wars Computers manufactures and sells pagers and radio paging systems which include a 6-month warranty on product defects. It also sells an extended warranty which provides an additional two years of protection beyond the 6-month warranty. On July 1, 2024, it sold a paging system for $4,500 and an extended warranty for another $1,400. The customer paid for the entire transaction with cash. Assuming a December 31, 2025, fiscal year-end, the journal entry to record the revenue recognized related to the extended warranty in 2025 would include:
Carla Vista Resellers Ltd. (CVRL) sells gently used and refurbished appliances. The company provides a three-month warranty that is included in the cost of the appliance. Claims under the warranties vary from replacing defective parts to providing customers with new appliances if repairs cannot be made. During 2024, the estimated cost related to the three-month warranties was $36,480, of which $24,000 had been incurred before year end ($18,240 on replacement appliances and $5,760 for parts). For an additional charge of $144, CVRL also offers extended warranty coverage for three years on its refurbished appliances. This amount is expected to cover the costs associated with the extended warranties. During 2024, CVRL sold 480 three-year warranty plans. The costs incurred during the year for repairs and replacements under these plans amounted to $14,400. Based on experience, the company estimates that its total warranty costs over the three-year coverage period will be $43,200, which it…
Brooks Corporation sells computers under a 2-year warranty contract that requires the corporation to replace defective parts and to provide the necessary repair labor. During 2020, the corporation sells for cash 400 computers at a unit price of $2,500. On the basis of past experience, the 2-year warranty costs are estimated to be $155 for parts and $185 for labor per unit. (For simplicity, assume that all sales occurred on December 31, 2020.) The warranty is not sold separately from the computer. Instructions a. Record any necessary journal entries in 2020. b. What liability relative to these transactions would appear on the December 31, 2020, balance sheet and how would it be classified? c. In 2021, the actual warranty costs to Brooks Corporation were $21,400 for parts and $39,900 for labor. Record any necessary journal entries in 2021.
On January 2, 2020, Whispering Company sells production equipment to Fargo Inc. for $ 48,000. Whispering includes a 2-year assurance warranty service with the sale of all its equipment. The customer receives and pays for the equipment on January 2, 2020. During 2020, Whispering incurs costs related to warranties of $ 930. At December 31, 2020, Whispering estimates that $610 of warranty costs will be incurred in the second year of the warranty. (a) Your answer has been saved. See score details after the due date. Prepare the journal entry to record this transaction on January 2, 2020, and on December 31, 2020 (assuming financial statements are prepared on December 31, 2020). (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter O for the amounts.) Date Account Titles and Explanation Debit Credi Jan. 2, 2020 cash 48000 Sales Revenue During 2020 Warranty Expense 930…