Question

Monty Corporation sells DVD players. The corporation also offers its customers a 4-year warranty contract. During 2020, Monty sold 20,000 warranty contracts at $81 each. The corporation spent $169,000 servicing warranties during 2020, and it estimates that an additional $845,000 will be spent in the future to service the warranties.

Prepare Monty’s journal entry for the sale of contracts. Assume the service costs are inventory costs. (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.) Prepare Monty’s journal entry for the recognition of warranty revenue. Assume the service costs are inventory costs. (Round intermediate calculations to 5 decimal places, e.g. 1.55467 and final answers to 0 decimal places, e.g. 5,125. 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.)

Prepare Monty’s journal entry for the cost of servicing the warranties. Assume the service costs are inventory costs. (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.)

Answer 1

Journal entry:
S.no.	Accounts title and explanations		Debit $	Credit $
a.	Cash account	(81*20000)	1620000
	Unearned Warranty service revenue		1620000
	(for sale made)
b.	Unearned warranty service revenue	270000		(1620000*169000/1014000)
	Warranty service revenue			270000
	(for revenue recognized)
c.	Warranty Service expense		169000
	Merchandise inventory			169000
	(for xpense incurred)