Question

Assurance warranty. Neuman management estimates that the probable cost of fulfilling the warranty will be $50,000. Between 1 May and 31 December 20X2, the actual warranty cost was $20,000. On 31 December 20X2, management decides that the probable additional warranty cost will be no more than $13,000. Between 1 January and 30 April 20X3, the additional cost was $11,000.

 

Required:

1. Prepare the entries concerning the sale and the warranty for 30 April 20X2 through 30 April 20X3.

2. Assume instead that the warranty now includes service and is sold separately with a stand alone value of $75,000. The product has a stand alone value of $580,000 and the total contract is $600,000. Prepare the relevant journal entries for 30 April 20X2 through 30 April 20X3.

Answer 1

Requirement 1 X Cost Deferral Method

 

30 April 20X2:

 

Accounts receivable		600,000
	Revenue		600,000

            To record the sale

 

The product cost should also be removed from inventory with a debit to cost of goods sold and a credit to inventory. This information has not been provided. 

 

 

Warranty expense		50,000
	Provision for warranty		50,000

            To set up the estimated warranty provision

 

1 May through 31 December 20X2:

 

Provision for warranty		20,000
	Cash, A/P, etc.		20,000

            To record costs incurred

 

31 December 20X2:

 

Provision for warranty		17,000
	Warranty expense		17,000

            To reduce warranty provision to new estimate.

 

1 January through 30 April 20X3:

 

Provision for warranty		11,000
	Cash, A/P, etc.		11,000

            To record costs incurred

 

30 April 20X3:

 

Provision for warranty		2,000
	Warranty expense		2,000

            To close out unused warranty provision

Requirement 2 X Revenue Deferral Method

 

This contract now has multiple performance obligations and so the contract consideration has to be allocated between the product and the warranty. The consideration is allocated based on relative stand-alone values as follows:

 

	Stand-alone values	Percentage	Allocation
Product	580,000	88.5%	531,000
Warranty	75,000	11.5%	69,000
	655,000		$600,000

 

30 April 20X2:

 

Accounts receivable		600,000
	Sales revenue		531,000
	Contract liability  - warranty		69,000

            To record the sale, with deferral for warranty

 

The product cost should also be removed from inventory with a debit to cost of goods sold and a credit to inventory. This information has not been provided. 

 

1 May through 31 December 20X2:

 

Warranty expense		20,000
	Cash, A/P, etc.		20,000

            To record costs incurred

 

Contract liability - warranty		46,000
	Sales revenue		46,000

            To amortize 8/12 of deferred revenue (May 1 to December 31, 20X2).

 

1 January through 30 April 20X3:

 

Warranty expense		11,000
	Cash, A/P, etc.		11,000

            To record costs incurred

 

Contract liability - warranty		23,000
	Sales revenue		23,000

            To amortize 4/12 of deferred revenue (Jan 1 to April 31, 20X3)