Question

Luke’s Car Corp. (LCC) sells the Exotica 3000, a luxury automobile for $200,000. A fiveyear “bumper to bumper” (all inclusive) warranty on this vehicle can be purchased for $20,000 by interested parties up to one year after the purchase date of the car. The car and warranty can be purchased as a package at time of sale for $215,000.

LCC is a publicly accountable enterprise; its year end is December 31. It recognizes revenue annually on the warranty agreement based on the passage of time. The costs of meeting the warranty obligation are expensed when incurred.

On January 1, 20X5, LCC sold five of the car/warranty packages to a wealthy family. The cost of the vehicles sold, which were in inventory, was $842,000. The cost of meeting the warranty during 20X5, which was paid in cash, totalled $7,000.

Round percentages to one decimal place — for example, 5.5%

Required:
Prepare journal entries pertaining to this transaction for January 1, 20X5, and December 31, 20X5, together with a summary journal entry to record the cost of meeting the warranty obligations in 20X5.

Answer 1

Date Account Titles and Explanation Debit Credit
Jan1 Cash (5 x $215000) 1075000
Sales revenue (5 x $195650)   978250
Deferred warranty revenue (5 x $19350)   96750
(To record sale of car/warranty packages)

Jan 1, Cost of goods sold 842000
Inventory    842000
(To record the cost of goods sold)

Dec 31   Deferred warranty revenue 19350
Warranty revenue ($96750/5 years) 19350
(To record warranty revenue recognized)

Dec 31, Warranty expense 7000
Cash 7000
(To record cost of warranty obligations)

Working:

Performance Obligation Standalone Selling Price Percent of Total StandalonePrice Allocated Transaction Price

Sale of car 200000 91% 195650
Sale of warranty   20000 9% 19350
Total 220000 100% 215000
Note: The percentages have been rounded off to the nearest whole
amount in the absence of specific instructions. Answers could vary
due to any different rounding off. Kindly round off as required.