Question

In: Accounting

On January 1, 2019, Dealership Inc. sold and delivered a car to a customer for $30,000...

On January 1, 2019, Dealership Inc. sold and delivered a car to a customer for $30,000 cash. The car included a basic standard one-year (assurance) warranty for major parts and a five-year extended warranty (commences January 1, 2019) for all parts and labour. Two performance obligations are identified: car and standard warranty; and the extended warranty.

The car could have been sold separately for $28,000 and the extended warranty for $4,000.
The estimated cost for the standard warranty is $350 and $350 of cash was spent in 2019 for the standard warranty.
The estimated cost for the extended warranty is $1,500 and costs are expected to be incurred about evenly during the five-year contract. $300 of cash was spent in 2019 relating to the extended warranty.

What is the total impact on revenue of Dealership in 2019 as a result of this scenario?
What is the impact on the liabilities section of the statement of financial position for Dealership at December 31, 2019 as a result of this scenario? List all accounts and amounts.

Expert Solution

If Car is sold as a package then revenue will be in total : : 30000$

If Car is sold separately then revenue will be : 28000$

Loss ( discount) in sale of Car is : 30000$- 28000$ = 2000$

Extended Waranty Cost lost: 4000$

If sold Separately : 28000$ + 4000$ = 32000$

If not sold separatrely: 30000$

Net loss will be = 2000$

As Car sold as package = $ 30000

Further cost incurred due to obligations during the period is : 300 $+ 350$ = 650$ all these are cost beared by the dealer for performingf his obligations.

a. discount given+ cost incurred to meet the obligation = 2000$ + 650$ = 2650$ , revenue will be down by 2650$ inthis scenario.

b. Liabilities will be increased in this scenario. As obligation has to be accrued in liabilty and shall be charged when same is performed. so, total liability for the extended Warranty will appear in Balance sheet is

Extended Warranty provision A/c = 1500$

Extende warranty provision charged to P and L A/c = 300$

Hence Extended Warranty provision A/c will be decreased by 300$ in the year 2019.

Standard Warranty Expenses A/c to be incurred and charged directly to the P and L A/c with $350,

ekkarill92 answered 2 years ago

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