Henry
Corporation sells DVDs. The corporation also offers to sell its customers a
two-year warranty contract as a separate service. During 2011, Henry sold
20,000 warranty contracts at $99 each. The corporation spent $180,000 servicing
warranties during 2011, and it estimates that an additional $900,000 will be
spent in the future to service the warranties. Henry recognizes warranty
revenue based on the proportion of costs incurred out of total estimated costs.
Prepare
Henry’s journal entries for
(a)
The sale of warranty contracts,
(b)
The cost of servicing the warranties,
(c)
The recognition of warranty revenue.
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(a)
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Cash .....................................
|
1,980,000
|
|
|
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Unearned
Warranty Revenue............
|
|
1,980,000
|
|
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(20,000 X $99)
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(b)
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Warranty Contract Expense.................
|
180,000
|
|
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Cash,
Inventory, etc.................
|
|
180,000
|
|
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|
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(c)
|
Unearned Warranty Revenue.................
|
330,000
|
|
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Warranty
Revenue.....................
|
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330,000
|
|
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[$1,980,000 X ($180,000/$1,080,000*)]
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* $180,000 + $900,000
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