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Sheryl Crow Equipment Company sold 500 Rollomatics during 2014 at $6,000 each. During 2014, Crow spent $20,000 servicing the 2-year warranties that accompany the Rollomatic. All applicable transactions are on a cash basis. Instructions (a) Prepare 2014 entries for Crow using the expense warranty approach. Assume that Crow estimates the total cost of servicing the warranties will be $120,000 for 2 years. (b) Prepare 2014 entries for Crow assuming that the warranties are not an integral part of the sale. Assume that of the sales total, $150,000 relates to sales of warranty contracts. Crow estimates the total cost of servicing the warranties will be $120,000 for 2 years. Estimate revenues to be recognized on the basis of costs incurred and estimated costs.

Answer

(a) As per the expense warranty approach for Crow, estimated total cost of servicing the warranties for 2 years is $120,000. To record 2014 sales, the following entries will be made: Debit Cash with $3,000,000 and Credit Sales revenue with $3,000,000. In addition, Debit Warranty expense with $120,000 and Credit Warranty liability with $120,000 to record the expenses related to warranty liability during 2014. (b) Assuming warranties are not an integral part of the sale, Crow estimates $150,000 of sales total relates to sales of warranty contracts. Also, the estimated total cost of servicing the warranties for 2 years is $120,000. Revenues will be recognized on the basis of costs incurred and estimated costs. To record 2014 sales, Debit Cash with $2,850,000 and Credit Sales revenue with $2,850,000. Further, Debit Cash with $150,000, Credit Unearned warranty revenue with $120,000, and Credit Warranty revenue with $30,000. To record the expenses related to warranty liability during 2014, Debit Warranty expenses with $20,000 and Credit Cash with $20,000. Since the warranty covers a 2 year period, the company cannot recognize any more warranty revenue yet.