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Accounting for Warranties / Warranty Revenue

11. (Warranties) Sheryl Crow Equipment Company sold 500 Rollomatics during 2004 at $6,000 each. During 2004, Crow spent $20,000 servicing the 2-year warranties that accompany the Rollomatic. All applicable transactions are on a cash basis.

Instructions

a. Prepare 2004 entries for Crow using the expense warranty approach. Assume that Crow estimates the total cost of servicing the warranties will be $120,000 for 2 years.

b. Prepare 2004 entries for Crow assuming that the warranties are not an integral part of the sale. Assume that of the sales total, $150,000 relates to sales of warranty contracts. Crow estimates the total cost of servicing the warranties will be $120,000
for 2 years. Estimate revenues earned on the basis of costs incurred and estimated costs

Solution Preview

(a)
Entry for cash received from sales
Cash 3,000,000
Sales 3,000,000
(500 X $6,000)

Entry for warranty expenses
Warranty Expense 20,000
Cash ...

Solution Summary

This post presents the accounting treatment for Warranties for Sheryl Crow Equipment Company using expense warranty approach and then by assuming the warranties as not an integral part of the sale. This includes help on completing the journal entries. All calculations shown with some worded explanation.

$2.19