Question

LGF Inc. sells furniture for $16,525. customers can buy a 5 years warranty on this furniture for $5,000 up to 1year after the purchase date of the product.  Furniture and warranty package costs $20,000 for special deal.

On January 1, 2007, the company sold 5 special deal packages. The cost of the furniture sold was $68,000.

The company paid cash of $700 for the cost of meeting the warranty during 2007.

The company recognizes revenue annually on the warranty agreement based on the passage of time.

Under IFRS, what is the journal entries for January 1, 2007 and December 31, 2007?

Answer 1

Here, it is a separate performance obligation, because the customer actually pays for it separately.

As per IFRS 15, the performance obligation related to the service type warranty is a performance obligation that qualifies for recognition at the point time services delivered as it enhances an asset that is controlled by the customer at the time of performance

The revenue from sale of furniture is recognized immediately at sale, because that’s when the furniture is delivered and performance obligation satisfied. However Revenue from warranties shall be deferred and would be recognised when the obligation is satisfied.

The journal entry at the time of sale of furniture is:

• Debit Cash: $100,000 ($20,000* 5) - Being Cash received from customer
• Credit Revenues from sale of fridge: $82625 (16525*5) - Being Revenue from sale of furniture
• Credit Unearned warranty revenue: $17375 - Being liability for warranties recognised

Cost of goods sold journal entry is-

• Debit cost of goods sold : $68000
• Credit Inventory : $ 68000

At the time of Warranty expense :

• Debit Unearned warranty revenue: 700
• Credit Warranty expense : 700 - Being Liability of warranty set off.