You have recently been hired as an Accountant for Arizona Corp., a manufacturer of equipment. Arizona follows ASPE but is considering becoming a public company in the next year. Arizona provides a 2 year warranty on its equipment sales and you are examining whether to treat the warranty as a Service-type or Assurance-type warranty for accounting purposes. Revenue would be realized on a straight-line basis if the Service-type approach is followed. Your research has uncovered the following data for 2020: Sales 50 units at $7,500 each (for simplicity assume all are cash sales and occur on January 1) Estimated warranty costs $700 per unit Actual 2020 costs incurred $25,000 Fair value of warranty $800 per unit a) For both the Service-type and Assurance-type approaches, prepare all necessary journal entries for 2020 b) Which approach is preferable? Support your conclusion with applicable account balances
You have recently been hired as an Accountant for Arizona Corp., a manufacturer of equipment. Arizona follows ASPE but is considering becoming a public company in the next year. Arizona provides a 2 year warranty on its equipment sales and you are examining whether to treat the warranty as a Service-type or Assurance-type warranty for accounting purposes. Revenue would be realized on a straight-line basis if the Service-type approach is followed. Your research has uncovered the following data for 2020: Sales 50 units at $7,500 each (for simplicity assume all are cash sales and occur on January
1) Estimated warranty costs $700 per unit Actual 2020 costs incurred $25,000 Fair value of warranty $800 per unit
a) For both the Service-type and Assurance-type approaches, prepare all necessary
b) Which approach is preferable? Support your conclusion with applicable account balances
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