Question

Early in 2020,Crow Equipment sold 500 Rollomatics at $6,000 each. During 2020, Crow spent $20,000 servicing the 2-year assurance warranties that accompany the Rollomatic. All applicable transactions are on a cash basis.
Instructions:
a. Prepare 2020 entries for Crow. Assume that Crow estimates the total cost of servicing the warranties in the second year will be $35,000.
b. Prepare 2020 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. Warranty costs incurred in 2020 were $20,000. Estimate revenues to be recognized on a straight-line basis.

Answer 1

Answer:

A.Dr Cash 3,000,000

Cr Sales Revenue 3,000,000

Dr Warranty Expense 20,000

Cr Cash, Supplies, Wages Payable 20,000

Dr Warranty Expense 35,000

Cr Warranty Liability 35,000

B.Dr Cash 3,000,000

Cr Sales revenue 2,944,000

Cr Unearned Warranty Revenue 56,000

Dr Warranty Expense 20,000

Cr Cash, Supplies, Wages Payable 20,000

Dr Unearned Warranty Revenue 28,000

Cr Warranty Revenue 28,000

Explanation:

a.Preparation of 2020 Journal entries for Crow

Dr Cash 3,000,000

Cr Sales Revenue 3,000,000

(500×6,000)

Dr Warranty Expense 20,000

Cr Cash, Supplies, Wages Payable 20,000

Dr Warranty Expense 35,000

Cr Warranty Liability 35,000

b.Preparation for 2020 Journal entries for Crow if the warranties are not an integral part of the sale.

Dr Cash 3,000,000

(500×$6,000)

Cr Sales revenue 2,944,000

(3,000,000-56,000)

Cr Unearned Warranty Revenue 56,000

Dr Warranty Expense 20,000

Cr Cash, Supplies, Wages Payable 20,000

Dr Unearned Warranty Revenue 28,000

Cr Warranty Revenue 28,000

(56,000/2)