Question

Bass hunt is a local outdoor store that competes with other outdoor stores.

They are proposing two marketing plans follow (consider them independent of each other)

Plan 1: They sell a deer tree stand. they take a standard tree and modify it to make it work.

- They sold 80 stands during 2018 for $400 each

- the stands are warrantied for 3 years (manufacture defects)

- the company's purchase cost per stand is $250 and they spent another $3,000 modifying the 80 stands.

- in addition to the sale of the stand, they sold extended warranties for 20 stands that added 2 years to the period.

- the extended warranty was sold for $250 each

- the company estimates that they will incur $2,600 of total cost servicing the 3 year standard warranty for the 80 stands sold during 2018.

Plan 2: they have a customer royalty program that "rewards" customer with one point for every $10 purchase.

- each point is redeemable for $1.00 off any purchase from the store in the next two years.

- during 2018, customers bought $100,000 of products and earned 10,000 points.

- the standalone selling price of the products was $100,000

- based on previous data, they expect 9,400 of the points to be redeemed from the 10,000

Required:

A- prepare journal entries for the 2018 sale of tree stands and warranty.

B- The company incurred $350 of warranty cost during 2018 relating with 2018 sales. prepare journal entry to record the incurrence of these costs and prepare any 12/31/18 adjusting entries.

C- prepare journal entries related to bonus point sales for 2018.

D- How much will the company recognize additional revenue in 2019 assuming 4,600 of the 2018 points are redeemed.

Answer 1

	Accounts and Explanation	Debit	Credit
A.	Cash	37000
	Sales revenue (80 x $400)		32000
	Unearned warranty revenue (20 x $250)		5000
	(To record sale of tree stands and warranty)
	Cost of goods sold [(80 x $250) + $3000]	23000
	Inventory		23000
	(To record the cost of sales)
	Warranty expense	2600
	Warranty liability		2600
	(To record estimated warranty liability)
B.	Warranty liability	350
	Cash		350
	(To record warranty costs incurred)
	Unearned warranty revenue	2500
	Warranty revenue ($5000/2)		2500
	(To record warranty revenue earned)
C.	Cash	100000
	Sales revenue		91000
	Unearned revenue		9000
	(To record the sales)
D.	Unearned revenue	4600
	Sales revenue		4600
	(To record additional revenue earned)

Working:

Performance obligation	Standalone Price $	Percent of total standalone	Allocation of transaction price $
Product	100000	91%	91000
Loyalty points	9400	9%	9000
Total	109400	100%	100000

Note: Percent of standalone price is rounded off to the nearest whole number.