1 answer

Carnes Electronics sells consumer electronics that carry a 90-day manufacturer's warranty. At the time of purchase,...

Question:

Carnes Electronics sells consumer electronics that carry a 90-day manufacturers warranty. At the time of purchase, customers
Carnes 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 $412,000 for these extended warranties (approximately evenly throughout the year) Required 1-a. Does this situation represent a provision? Yes No 1-b. How should it be accounted for? Revenue is deferred as a liability sale, and recognized on straight-line basis at the time of 2. Prepare journal entries that summarize sales of the extended warranties (assume all credit sales) and any aspects of the warranty that should be recorded during the year. (Round your answers to 2 decimal places.) General Journal Debit Credit During the year Accounts receivable 412000 412000 Unearned revenue-extended warranties December 31 (adjusting entry) Unearned revenue-extended warranties Revenue-extended warranties 206000 206000

Answers

Selling extended warranties means that the customer gets an extended coverage of protection despite of normal manufacture warranty period.

When there is a sale of extended warranties this means that the seller is liable to give services if in case the consumer incurs any defects in the product.

This means that the extended warranties money that has been received today is actually for the services that are to be delivered in future.

So the revenue is deferred and no provision is required to be made.

Required: 1-a. Does this situation represent a provision? O Yes No

The accounting of deferred revenue is done on the basis of straight line method, this means that if the extended warranty is for five year we will recognize the revenue on straight line method. The revenue that will be recognized will be “charges of extended warranties/5years”

1-b. How should it be accounted for? Revenue is deferred as a liability sale, and recognized on straight-line basis at the ti

Yes, the below Journal entries are correct because the extended warranties are to be written off in 2 years and on the basis of straight line method.

412000/2 =206000

General Journal Debit Credit During the year Accounts receivable 412000 Unearned revenue-extended warranties 412000 December

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