Question

Extended warranties

Answer 1

Solution :

1. This is not a loss contingency as extended warranty is being priced as well sold separately from warranted products and therefore constitutes the separate sales transaction.

2.

Event    General Journal                                                  Debit          Credit

1           Cash                                                                   $412,000

          Unearned revenue -- extended warranties                           $412,000

2.      Unearned revenue -- extended warranties       $ 57937.50

          Revenue - Extended Warranties                                           $ 57937.50

Working :

The manufacturer provided 90 days which is 3 months of free warranty. Thus a customer who is purchasing the extended warranty is for 09 months.

Now amount received by Carnes Electronics for the extended warranty in one year = $412,000

So, $\ 412,000 \times \frac{9}{12}= \ 309000$   of sales.

The warranty is for two years and so 4.5 months in one year.

Therefore the revenue earned on the extended warranty is :

$\ 309000 \times \frac{4.5 \text{ months}}{24 \text{ months}}$

= $ 57937.50