Answer:
(a) Prepare 2014 entries for Crow using the expense warranty approach. Assume that Crow estimates the total cost of servicing the warranties will be $120,000 for 2 years.
To record the 2014 sales:
Dr Cash 3,000,000
Cr Sales revenue 3,000,000
Dr Warranty expense 120,000
Cr Warranty liability 120,000
To record the expenses related to warranty liability during 2014
Dr Warranty liability 20,000
Cr Cash 20,000
(b) Prepare 2014 entries for Crow assuming that the warranties are not an integral part of the sale. Assume that of the sales total, $150,000 relates to sales of warranty contracts. Crow estimates the total cost of servicing the warranties will be $120,000 for 2 years. Estimate revenues to be recognized on the basis of costs incurred and estimated costs.
To record the 2014 sales:
Dr Cash 2,850,000
Cr Sales revenue 2,850,000
Dr Cash 150,000
Cr Unearned warranty revenue 120,000
Cr Warranty revenue 30,000
To record the expenses related to warranty liability during 2014
Dr Warranty expenses 20,000
Cr Cash 20,000
Since the warranty covers a 2 year period, the company cannot recognize any more warranty revenue yet.
