Question

Kimmel Corp. uses the expense approach (assurance type) to account for warranties. They sell a used car for $30,000 on Oct 25, Year 6, with a one-year warranty covering parts and labour. Warranty expense is estimated at 2% of the selling price, and the appropriate adjusting entry is recorded on Dec 31, Year 6. On March 12, Year 7, the car is returned for warranty repairs. This cost Kimmel $320 (you can assume a cash credit). Provide the journal entry for the March 12, repair.

        

b) In Year 8, Kimmel Corp. began selling an extended warranty (service type) for its used cars that will provide three years of coverage. Expenditures are estimated to occur evenly over the three years. The average selling price is $8,000, and the extended warranty sells for $999. Of the 1,000 cars sold in Year 8, 60% of customers purchased the warranty. Assume all sales occurred on July 1. There were no warranty claims during Year 8. Provide the journal entry (entries) to record the sale of vehicles and the extended warranty.

Answer 1

Date	General Ledge	Debit	Credit
12-Mar	Provision for warranty A/c---Dr	320
	To Cash A/c		320
	(Being provision used for actual expenses)
July 1, Year 8	Cash A/c----Dr	8,000,000
	To Revenue A/c		8,000,000
	(Being sales recorded for Car)
	cash A/c---Dr	599,400
	To Deferred revenue A/c		599,400
	(Being extended warranty sold and recorded as deferred revenue)
	Warranty expenses A/c---Dr	160,000
	To Warranty Provision A/c		160,000
	(Being 2% warranty provision created for sales of car)