Question

Leppard Corporation sells DVD players. The corporation also offers its customers a 2-year warranty contract. During 2014, Leppard sold 20,000 warranty contracts at $109.20 each. The corporation spent $182,000 servicing warranties during 2014, and it estimates that an additional $910,000 will be spent in the future to service the warranties.
a. Prepare Leppard’s journal entries for the sale of contracts. Assume the service costs are inventory costs.

b. Prepare Leppard’s journal entries for the cost of servicing the warranties. Assume the service costs are inventory costs.

c. Prepare Leppard’s journal entries for the recognition of warranty revenue. Assume the service costs are inventory costs.

Answer 1

Answer:

A. Dr Cash $2,184,000

Cr Unearned warranty revenue $2,184,000

B. Dr Warranty expense $182,000

Cr Inventory $182,000

C. Dr Unearned warranty revenue 364,000

Cr Warranty revenue 364,000

Explanation:

a. Preparation of thr Leppard’s journal entries for the sale of contracts

Dr Cash $2,184,000

($20,000 x$109.20 each)

Cr Unearned warranty revenue $2,184,000

(Being to record sale of contracts)

b. Preparation of Leppard’s journal entries for the cost of servicing the warranties.

Dr Warranty expense $182,000

Cr Inventory $182,000

(Being to record Cost of servicing warranty)

c. Preparation of Leppard’s journal entries for the recognition of warranty revenue.

Dr Unearned warranty revenue 364,000

Cr Warranty revenue 364,000

(Being to record recognized warranty revenue)

Calculation for recognized warranty revenue

First step is to calculate the Total expected cost

Total expected cost = 182,000 + 910,000

Total expected cost= 1,092,000

Now let calculate warranty revenue

Warranty revenue=182,000/ 1,092,000 x $2,184,000

Warranty revenue = 364,000