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Early in 2017, Sheryl Crow Equipment Company sold 500 Rollomatics during 2017 at $6,000 each. During 2017, Crow spent $20,000 servicing the 2-year assurance warranties that accompany the Rollomatic. All applicable transactions are on a cash basis. nstructions (a) Prepare 2017 entries for Crow. Assume that Crow estimates the total cost of servicing the warranties will be $55,000 for 2 years. (b) Prepare 2017 entries for Crow assuming that the warranties are not an integral part of the sale (a service-type warranty). Assume that of the sales total, $56,000 relates to sales of warranty contracts. Crow estimates the total cost of servicing the warranties will be $55,000 for 2 years. Estimate revenues to be recognized on a straight-line basis.

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Answer:

The Journal entries are as follows:

(i) At sale,

Cash A/c Dr. (500 × $6,000) $3,000,000

    To  Sales revenue                                      $2,944,000

    To Unearned Warranty Revenue              $56,000

(To record the sales)

(ii) During the year 2017,

Warranty Expense A/c Dr. $20,000

          To cash A/c                             $20,000

(To record the warranty expense)

(iii) On December 31st, 2017

Unearned Warranty Revenue A/c Dr. $28,000

             To Warranty Revenue                           $28,000

(To record the warranty revenue)

Workings:

Straight line basis:

= $56,000 ÷ 2

= $28,000

(iv) On December 31st, 2017

Warranty expense A/c Dr. $35,000

         To warranty liability                 $35,000

(To record the warranty liability)

Workings:

Warranty expense = Expected cost - Actual cost

                               = $55,000 - $20,000

                               = $35,000

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