November 1st, 2020: All 200 students of ABC class at HKU buy Tesla Care warranty protection from Tesla Inc. for which they pay $10,000 each for their Tesla cars. They each pay Tesla cash of 10,000 each on November 1st for the contract. The Tesla Care contract lasts 2 months and allows students to replace their Tesla Car battery if the battery fails within the 2 months until December 31st, 2020. Once Tesla provides a replacement battery, the contract expires, and no more replacement batteries will be provided to the same student’s car. 20 students’ find that on December 15th, 2020, their Tesla car batteries stop working and Tesla immediately replaces the car battery. The replacement batteries cost Tesla $40,000. Record all journal entries for Tesla between November 1st, 2020 and December 31st, 2020. (3 points total) How much profit (or loss) did Tesla Inc. make from selling these Tesla Care contracts?
Journal entries:
| Date | Particulars | Amount (Dr) | Amount (Cr) |
| 1-Nov | Cash Account | $2,000,000 | |
| Warranty sales | $2,000,000 | ||
| (Warranty sales recorded) | |||
| 15-Dec | Warranty replacement cost | $800,000 | |
| Cash or Bank Account | $800,000 | ||
| (Cost incurred on account of warranty sales) |
Profit from sale of warranty = Warranty sales - Warranty replacement cost
=$2,000,000 - $800,000
=$1,200,000
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