Smythe Corporation sells televisions at an average price of $850

Smythe Corporation sells televisions at an average price of $850 and they come with a standard one-year warranty. The company also offers each customer a separate three-year extended warranty contract for $90 that requires the company to perform periodic services and replace defective parts. The extended warranty begins one year after the purchase date. During 2011, the company sold 300 televisions and 270 extended warranty contracts for cash. Company records indicate that warranty costs in the first year after purchase average $25 per set: $15 for parts and $10 for labour.

Smythe estimates the average three-year extended warranty costs as $20 for parts and $40 for labour. Assume that all sales occurred on December 31, 2011, and that all warranty costs are expected to be incurred evenly over the warranty period.

Instructions

Answer (a) and (b) based on the information above.

(a) Record any necessary journal entries in 2011.

(b) What liabilities relative to these transactions would appear on the December 31, 2011 balance sheet and how would they be classified? Answer (c) and (d) assuming that in 2012 Smythe Corporation incurred actual costs relative to 2011 television warranty sales of $4,410 for parts and $2,940 for labour.

(c) Record any necessary journal entries in 2012 relative to the 2011 television warranties.

(d) What amounts relative to the 2011 television warranties would appear on the December 31, 2012 balance sheet and how would they be classified? Answer (e) and (f) assuming that in 2013 Smythe Corporation incurred the following costs relative to the extended war ranties sold in 2011: $2,000 for parts and $3,000 for labour.

(e) Record any necessary journal entries in 2013 relative to the 2011 television warranties.

(f) What amounts relative to the 2011 television warranties would appear on the December 31, 2013 balance sheet and how would they be classified?

(a)	Cash  ...............................................................................................	279,300
	Sales (300 X $850).............................................................		255,000
	Unearned Warranty Revenue..........................................		24,300
	(270 X $90)
	Warranty Expense .........................................................................	7,500
	Estimated Liability Under                  Warranties......................................................................		7,500
	(300 X $25)
(b)	Current Liabilities:
	Estimated Liability Under                   Warranty.........................................................................		$  7,500
	Long-term Liabilities:
	Unearned Warranty Revenue..........................................		$24,300
(c)	Estimated Liability Under       Warranties..................................................................................	7,350
	Parts Inventory....................................................................		4,410
	Accrued Payroll..................................................................		2,940
(d)	Current Liabilities:
	Unearned Warranty Revenue*........................................		$  8,100
	Long-term Liabilities:
	Unearned Warranty Revenue..........................................		$16,200
*   The extended warranty costs are expected to be incurred uniformly over the warranty period ($24,300 / 3 = $8,100).

The company would also have a remaining balance of $90 ($4,500 – $4,410) in Estimated Liability Under Warranties. This balance would be included in the new liability generated from current year sales of televisions. If the remaining amount is considered substantial, it would lead to a revision of the estimate of warranty costs for the current year. 

(e)	Unearned Warranty Revenue................................	8,100
	Warranty Revenue........................................		8,100
	Warranty Expense....................................................	5,000
	Parts Inventory...............................................		2,000
	Accrued Payroll.............................................		3,000
(f)	Current Liabilities:
	Unearned Warranty Revenue....................		$  8,100
	Long-term Liabilities:
	Unearned Warranty Revenue....................		$  8,100