Question

Dos Passos Company sells televisions at an average price of $900 and also offers to each customer a separate 3- year warranty contract for $90 that requires the company to perform periodic services and to replace defective parts. During 2017, the company sold 300 televisions and 270 warranty contracts for cash. It estimates the 3- year warranty costs as $20 for parts and $40 for labor, and accounts for warranties separately. Assume sales occurred on December 31, 2017, and straight-line recognition of warranty revenues occurs.

Required:
a. Record any necessary journal entries in 2017.
b. What liability relative to these transactions would appear on the December 31, 2017, balance sheet and how would it be classified? In 2018, Dos Passos Company incurred actual costs relative to 2017 television warranty sales of $2,000 for parts and $4,000 for labor.
c. Record any necessary journal entries in 2018 relative to 2017 television warranties.
d. What amounts relative to the 2017 television warranties would appear on the December 31, 2018, balance sheet and how would they classified?

Answer 1

a). Cash $ 294,300

Sales (300 x $ 900) 270,000

Revenue unearned warranty (270 x $ 90) 24,300

b). The current liabilities

Revenue unearned warranty ($ 24,300/3)... $ 8100

Long term liabilities

Revenue unearned warranty ($24,300 x 2/3) $ 16,200

c). Revenue unearned warranty 8,100

Warranty revenue 8,100

Warranty expenses 6,000

Parts inventory 2000

Accrued payroll 4000

d). Current liabilities

Revenue unearned warranty 8,100

Long term liabilities

Revenue unearned warranty 8,100