Question

Indigo Company sells televisions at an average price of $990 and also offers to each customer a separate 3-year warranty contract for $93 that requires the company to perform periodic services and to replace defective parts. During 2020, the company sold 327 televisions and 227 warranty contracts for cash. It estimates the 3-year warranty costs as $21 for parts and $41 for labor, and accounts for warranties separately. Assume sales occurred on December 31, 2020, and straight-line recognition of warranty revenues occurs.

1. Record any necessary journal entries in 2020. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Account Titles and Explanation	Debit	Credit

2. What liability relative to these transactions would appear on the December 31, 2020, balance sheet and how would it be classified?

Indigo Company Balance Sheet (Partial)                                                                       For the Month Ended December 31, 2020/ December 31, 2020/ For the Year Ended December 31, 2020
Current AssetsCurrent LiabilitiesIntangible AssetsLong-term LiabilitiesLong-term DebtProperty, Plant and EquipmentStockholders' EquityTotal AssetsTotal Current AssetsTotal Current LiabilitiesTotal Intangible AssetsTotal LiabilitiesTotal Liabilities and Stockholders' EquityTotal Long-term LiabilitiesTotal Long-term DebtTotal Property, Plant and EquipmentTotal Stockholders' Equity:
			$
Current AssetsCurrent LiabilitiesIntangible AssetsLong-term LiabilitiesLong-term DebtProperty, Plant and EquipmentStockholders' EquityTotal AssetsTotal Current AssetsTotal Current LiabilitiesTotal Intangible AssetsTotal LiabilitiesTotal Liabilities and Stockholders' EquityTotal Long-term LiabilitiesTotal Long-term DebtTotal Property, Plant and EquipmentTotal Stockholders' Equity:
			$

3.

In 2021, Indigo Company incurred actual costs relative to 2020 television warranty sales of $2,170 for parts and $4,320 for labor.

Record any necessary journal entries in 2021 relative to 2020 television warranties. Use "Inventory" account to record the warranty expense. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Account Titles and Explanation	Debit	Credit
(To record the warranty revenue earned.)
(To record the warranty expense.)

4. What amounts relative to the 2020 television warranties would appear on the December 31, 2021, balance sheet and how would they be classified?

Indigo Company Balance Sheet (Partial)                                                                       December 31, 2021For the Year Ended December 31, 2021For the Month Ended December 31, 2021
Current AssetsCurrent LiabilitiesIntangible AssetsLong-term LiabilitiesLong-term DebtProperty, Plant and EquipmentStockholders' EquityTotal AssetsTotal Current AssetsTotal Current LiabilitiesTotal Intangible AssetsTotal LiabilitiesTotal Liabilities and Stockholders' EquityTotal Long-term LiabilitiesTotal Long-term DebtTotal Property, Plant and EquipmentTotal Stockholders' Equity:
			$
Current AssetsCurrent LiabilitiesIntangible AssetsLong-term LiabilitiesLong-term DebtProperty, Plant and EquipmentStockholders' EquityTotal AssetsTotal Current AssetsTotal Current LiabilitiesTotal Intangible AssetsTotal LiabilitiesTotal Liabilities and Stockholders' EquityTotal Long-term LiabilitiesTotal Long-term DebtTotal Property, Plant and EquipmentTotal Stockholders' Equity:
			$

Answer 1

1.

	Debit	Credit
Cash	344,841
To Sales Revenue(327 * $990)		323,730
To Unearned Warranty Revenue(227 * $93)		21,111

2.

Current Liabilities:
Unearned Warranty Revenue=($21,111/3)	7,037
Long Term Liabilities
Unearned Warranty Revenue=($21,111*2/3)	14,074

3.

	Debit	Credit
Unearned Warranty Revenue	7,037
To Warranty Revenue		7,037
(Being amount of Warranty Revenue)
Warranty Expense	6,490
To Inventory		2,170
To Salaries and Wages Payable		4,320

4.

Current Liabilities:
Unearned Warranty Revenue=($21,111/3)	7,037
Long Term Liabilities
Unearned Warranty Revenue($14,074 - 7,037)	7,037