Question

You purchase a new automobile from Hanlin Auto for $20,000. In addition to the regular warranty on the auto (the manufacturer will pay for all repairs for the first 36,000 miles or three years, whichever comes first), you purchase at a cost of $600 an extended warranty that protects you for an additional 3 years or 36,000 miles. Hanlin Auto records the sale of the automobile (with the regular warranty) and the sale of the extended warranty on Jan. 2, 2014.

A. What journal entries does Hanlin records on Jan. 2, 2014?
B. What journal entry does Hanlin record at the end of the 4th year (using straight-line amortization)?

Answer 1

On Jan. 2, 2014, Hanlin Auto would record journal entries for the sale of the automobile and extended warranty. At the end of the 4th year, using straight-line amortization, Hanlin Auto would record a journal entry for warranty revenue.

Step-by-step explanation:

On Jan. 2, 2014, Hanlin Auto would record the following journal entries:

A. For the sale of the automobile with the regular warranty:

• Debit: Accounts Receivable - $20,000
• Credit: Sales Revenue - $20,000

B. For the sale of the extended warranty:

• Debit: Accounts Receivable - $600
• Credit: Sales Revenue - $600

At the end of the 4th year, using straight-line amortization, Hanlin Auto would record the following journal entry:

• Debit: Deferred Warranty Revenue - $150 ($600 / 4 years)
• Credit: Warranty Revenue - $150