Warranty Liability, Assurance-Type Warranty, Service-Type Warranty. Michael and Sons, Ltd. sells lawn and garden products for home use. The company offers an assurance-type warranty that covers all repair costs, including parts and labor, for 1 year after the date of sale of lawn tractors. Michael also sells a service-type warranty contract that covers all parts and labor for 5 years after the date of sale of lawn tractors. In the year in which it sold the products, the company sold 8,000 service-type warranties at a price of $175 per contract and received cash. Michael and Sons sold the contracts at the end of the year and did not recognize warranty revenue in the year of the sale. Michael and Sons did not make any actual repairs in the year of the sale during the base warranty period. During the following year, the company incurred $98,100 in actual warranty claims that are now covered only under the service-type warranty contract. The repair costs included $61,000 in parts and $37,100 in labor (unpaid). Prepare the
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- Cullumber Resellers Ltd. (CRL) sells gently used and refurbished appliances. The company provides a three-month warranty that is included in the cost of the appliance. Claims under the warranties vary from replacing defective parts to providing customers with new appliances if repairs cannot be made. During 2024, the estimated cost related to the three-month warranties was $41,040, of which $27,000 had been incurred before year end ($20,520 on replacement appliances and $6,480 for parts). For an additional charge of $162, CRL also offers extended warranty coverage for three years on its refurbished appliances. This amount is expected to cover the costs associated with the extended warranties. During 2024, CRL sold 540 three-year warranty plans. The costs incurred during the year for repairs and replacements under these plans amounted to $16,200. Based on experience, the company estimates that its total warranty costs over the three-year coverage period will be $48,600, which it expects…arrow_forwardcvcrrrrarrow_forwardCullumber Ltd. sells computers, computer accessories, and software. On its computer sales, the company provides a one-month warranty that is included in the cost of the computer. Claims under the warranties vary from replacing defective items to providing customers with refunds if they choose. During 2024, the estimated costs related to the one-month warranties was $52,000, of whic $46,800 had been incurred before year end ($39,000 for replacement items and $7,800 in refunds). For an additional charge of $130, Computers Galore also offers extended warranty coverage for two years on its computers. This amount is expected to cover the costs associated with the extended warranties. During 2024, Computers Galore sold 1,040 two-ye warranties. The costs incurred during the year for replacements under these warranties amounted to $40,300. Based on experienc the company estimates that its total warranty costs over the two-year coverage period will be $78,000, which it expects will occur evenly…arrow_forward
- Circuit Fitness (CF) sells treadmills and other related exercise equipment. CF offers customers the following purchase options: 1) purchase a treadmill including a one year basic warranty or 2) purchase a treadmill including the one year basic warranty and an extended 2 year warranty (total of 3 years for warranty coverage). The standalone pricing of the treadmill with the base one year warranty is $1,400 and the standalone pricing of the extended two years warranty is $250. Assume on October 1st, 2021 CF entered into a contract with a customer to sell one treadmill with the extended two year warranty for a total sales price of $1,600. CF receives payment from the customer for the treadmill with an extended two year warranty on October 4th, 2021. The treadmill is delivered by CF on October 8th, 2021. The warranty is initiated at that time as well by CF. Circuit Fitness’s fiscal year is January 1- December 31. Apply the requirements of ASC 606; Revenue From Contracts with…arrow_forwardCarnes Electronics sells consumer electronics that carry a 90-day manufacturer’s warranty. At the time of purchase, customers are offered the opportunity to also buy a two-year extended warranty for an additional charge. During the year, Carnes received $428,000 for these extended warranties (approximately evenly throughout the year). 2. Prepare journal entries that summarize sales of the extended warranties and any aspects of the warranty that should be recorded during the year.arrow_forwardTexans Corp. uses the assurance-type (a.k.a. expense) approach to account for warranties. They sell a used car for $ 30,000 on October 25, 2020, with a one-year warranty covering parts and labour. Warranty expense is estimated at 2% of the selling price, and the appropriate adjusting entry is recorded at December 31, 2020. On March 12, 2021, the car is returned for warranty repairs. This cost Texans the sum of $ 200 in parts and $ 120 in labour. Instructions Provide appropriate adjusting entries on December 31, 2020. Briefly explain the assurance type approach to account for warranties. Provide the entries required on March 12, 2021. With proper title and classification, present the amount of the warranty liability that would be shown on Texans’ balance sheet on December 31, 2021arrow_forward
- On December 31, 2022, Golden Egg Company sells farming equipment to Feather Inc. for $50,000. Golden Egg includes a one-year assurance warranty service with the sale of all its equipment. The customer receives and pays for the equipment on December 31, 2022. Golden Egg estimates the prices to be $48,800 for the equipment and $1,200 for the cost of warranty. Required Are the sale of the equipment and the warranty separate performance obligations within the contract? Explain. Prepare the journal entry to record this transaction on December 31, 2022. Ignore any related cost of goods sold entry. Repeat the requirements for part 2, assuming that, in addition to the assurance warranty, Golden Egg sold an extended warranty (service-type warranty) for an additional two years (2024–2025) for $800.arrow_forwardVera., a dealer of household appliances, sells washing machines at an average price of P8,100. The Company also offers to each customer a separate 3-year warranty contract for P810 that requires the Company to provide periodic maintenance services and to replace defective parts. During 2022, Vera sold 300 washing machines and P270 warranty contracts for cash. The Company estimates that the warranty costs are P180 for parts and P360 for labor. Assume sales occurred on December 2022, Veras policy is to recognize income from the warranties on a straight line basis. In 2023, Vera, incurred actual costs relative to 2022 warranty sales of P18,000 for parts and P36,000 for labor. Q10 – What is the amount of current liability relative to these transactions would appear on the 12/31/2022 SFP? Q11 – What is the amount of non-current liability relative to these transactions would appear on the 12/31/2022 SFP? Q12 – What amount of warranty expense would be shown on the income statement for the…arrow_forwardTechtronics, Inc. manufactures and sells stereo systems that include an assurance-type warranty for the first 90 days. Techtronics also offers an optional extended coverage plan under which it will repair or replace any defective part for 2 years beyond the expiration of the assurance-type warranty. The total transaction price for the sale of the stereo system and the extended warranty is $3,000. The standalone price of each is $2,300 and $900, respectively. The estimated cost of the assurance-warranty is $350. The accounting for warranty will include a A) debit to Warranty Expense, $900. B) debit to Warranty Liability, $350 C) credit to Warranty Liability, $900 D) credit to Unearned Warranty Revenue, $900arrow_forward
- 1. On January 1,2019, QWERTY Company introduced a new line of product that carries a 3 year warranty against factory defects. The product warranties provide assurance that the new line of product will function as intended based on agreed-upon specifications. Estimated warranty costs related to peso sales are as follows: 2% of sales in the year of sale, 4% of sales in the year after sale, and 6% of sales in the second year after sale. Sales and warranty expenditures for the period 2019 to 2021 were as follows: Sales Actual warranty expenditures 2019 P 5,000,000 P 100,000 2020 7,500,00 150,000 2021 10,000,000 200,000 The company's reporting period is a calendar year. How much is the warranty liability as of December 31,2021? 2. If Chimmy Co. issued a 3-year non-interest bearing note in exchange of an equipment for P 1,000,000, which of the…arrow_forwardCreative Computing sells a laptop computer called the Creative Package to Professor Smith with an extended warranty for $780. The $780 price of a Creative Package includes the following: One laptop Computer A one year basic assurance warranty. This warranty guarantees that Creative will cover any costs that arise due to repairs or replacements associated with defective products for up to one year. An agreement that Professor Smith will pay an additional $75 to purchase an extended 1 year warranty. How many performance obligations are included in this sale of the Creative Package? Question 13 options: a) 1 b) 2 c) 3 d) 4arrow_forwardSandhill Inc. manufactures and sells computers that include an assurance-type warranty for 90 days. Sandhill offers an optional extended coverage plan under which it will repair or replace any defective part for three years from the expiration of the assurance- type warranty. Because the optional extended coverage plan is sold separately. Sandhill determines that the three years of the extended coverage represent a separate performance obligation. The total transaction price for the sale of a computer and the extended warranty is $3,860 on October 1, 2023. Sandhill determines that the stand-alone selling price of each is $3,250 and $610, respectively. Further, Sandhill estimates, based on historical experience, that it will incur $240 in costs to repair defects that arise within the 90-day coverage period for the assurance-type warranty. The cost of the equipment is $1,410. (b) Prepare the journal entry (or entries) to record the cash sale of the computer, cost of goods sold, and…arrow_forward
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