Question

Rich Company sells yachts. The yachts have a standard two year warranty included in the sales price and an optional additional two-year extended warranty available for purchase. Tiger Woods bought 1 yacht on January 1, 20X1, information on the sale is below. He bought the extended warranty.

Sales price 10,000,000
Cost of goods sold 8,510,000
Extended warranty sales price 680,000

Estimated costs for warranty
Standard warranty 280,000
Extended warranty 442,000

Actual cost of warranty work performed
Warranty cost in 20x1 115,000
Warranty cost in 20X2 129,000
Warranty cost in 20X3 258,000
Warranty cost in 20X4 313,000

Assuming no taxes, what is the net income (revenues less expenses) recognized in 20X3 from this sale?

Answer 1

The extended warranty value $680000

The extended warranty period. 2 years.

Assuming that equal coverage has been given to each year. There for the revenue amount allocated for the first year of the extended warranty period is $340000. (680000/2 years)

Warranty cost incurred in 20x3 is $258000

Income = Revenue - cost

Income of 20x3 = 340000-258000=$82000

Income to be recognized is $ 82000.