Question

Exercise 13-22

Culver Machinery Co. manufactures equipment to a very high standard of quality; however, it must still provide a warranty for each unit sold, and there are instances where the machines do require repair after they have been put into use. Culver started in business in 2020, and as the controller, you are trying to determine whether to use the assurance-type or service-type warranty approach to measure the warranty obligation. You would like to show the company president how this choice would affect the financial statements for 2020, and advise him of the better choice, keeping in mind that the service-type approach is consistent with IFRS, and that there are plans to take Culver public in a few years.

You have determined that sales on account for the year were 1,100 units, with a selling price of $3,200 each. Ignore any cost of goods sold. The warranty is for two years, and the estimated warranty cost averages $210 per machine. Actual costs of servicing warranties for the year were $115,500. You have done some research and determined that if the service-type approach were to be used, the portion of revenue allocated to the warranty portion of the sale would be $350. Because the costs of servicing warranties are not incurred evenly, warranty revenues are recognized based on the proportion of costs incurred out of the total estimated costs.

A.) For the assurance-type approach, prepare the necessary journal entries to record all of the transactions described. Payments for completed warranty repairs are paid in cash.

Account Titles and Explanation	Debit	Credit
(Account Name)
(Account Name)
To record sales on account
(Account Name)
(Account Name)
To record payment of warranty expense
(Account Name)
(Account Name)
To accrue warranty expense

Determine the warranty liability and expense amounts on the financial statements at the end of 2020.

Warranty Liability: $________

Warranty Expense: $_________

B.) For the service-type approach, prepare the necessary journal entries to record all of the transactions described.

Account Titles and Explanation	Debit	Credit
(Account Name)
(Account Name)
(Account Name)
To record the sale
(Account Name)
(Account Name)
to record warranty cost incurred
(Account Name)
(Account Name)
To remeasure the unearned revenue account

Determine the unearned revenue and expense amounts on the financial statements at the end of 2020.

Unearned Revenue: $________

Warranty Expense: $_________

(List of Possible Accounts for all parts of question: No Entry, Accounts Receivable, Materials Cash Payables, Cash, Warranty Liability, Sales Revenue, Warranty Revenue, Unearned Revenue, Warranty Expense)

Answer 1

Part 1

Assurance-type Warranties (Expense approach)
Date	General Journal	Debit	Credit
Jan 1, 2020	Cash	3,520,000
	Sales Revenue		3,520,000
	(To record Sales revenue on cash.) (1100*3200)
During the year	Warranty Liability	115,500
	Materials / Cash / Payables		115,500
	(To record warranty claims.)
Dec 31, 2020	Warranty expense	231,000
	Warranty Liability		231,000
	(To record warranty expense as Assurance Type.) (1100*210)

Warranty Liability (231000-115500)	115,500
Warranty Expense	231,000

Part 2

Service-type Warranties (Revenue Approach)
Date	General Journal	Debit	Credit
Jan 1, 2020	Cash (1100*3200)	3,520,000
	Sales revenue (1100*(3200-350))		3,135,000
	Unearned Revenue [Unearned Warranty Revenue] (1100*350)		385,000
	(To record the sale.)
During the year	Warranty expense	115,500
	Cash		115,500
	(To record warranty expense as Service-type.)
Dec 31, 2020	Unearned Revenue [Unearned Warranty Revenue]	192,500
	Warranty Revenue		192,500
	(To record Warranty Service revenue) (385000/2 years)

Unearned Revenue (385000-192500)	192,500
Warranty Expense	192,500