Chapter 13, Problem 13.18BE

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 journal entries required to record the effects of offering the service-type warranty contract in the year of the sale and during the following year.