Question

Jing Fang Su Equipment Company sold 1,500 Rollomatics during 20X8 at $8,000 each. During 20X8, Jing Fang Su spent $180,000 servicing the two‑year warranties that accompany the Rollomatic. All applicable transactions were on a cash basis.            

Required:

1. Prepare 20X8 the entries for Jing Fang Su using the warranty expense treatment. Assume that Jing Fang Su estimates the total cost of servicing the warranties to be $450,000 for two years.      

2. Prepare 20X8 entries for Jing Fang Su assuming that the warranties are not an integral part of the sale. Assume that of the sales total, $600,000 relates to sales of warranty contracts. Jing Fang Su estimates the total cost of servicing the warranties will be $450,000 for two years. Estimate revenues earned on the basis of costs incurred and estimated costs.

Answer 1

S.No	Particular	Debit $	Credit $
1	Cash Account	12,000,000
	To Sales Revenue		12,000,000
	(1500 Rollomatics * $8000)
	Warranty Expenses	$180,000
	To Cash Account		$180,000
	(Amount spent on servicing)
	Warranty Expenses	$450,000
	To Warranty Liability		$450,000
2	Cash Account	$12,000,000
	To Sales Revenue		$11,400,000
	To Unearned warranty revenue		$600,000
	Warranty Expense	$180,000
	To Cash Account		$180,000
	(Amount spent on servicing)
	Unearned Warranty Revenue	$300,000
	To Warranty Revenue ($600000 / 2)		$300,000