During 2017, Seagul Outboards sold 200 outboard engines for $250 each. The engines are under a one-year warranty for parts and labor, and from past experience, the company estimates that, on average, warranty costs will equal $20 per engine. As of December 31, 2017, 50 engines had been serviced at a total cost of $1,400. During 2018, engines were serviced at a total cost of $2,600. Assume that all repairs used cash.
a. Prepare the journal entries that would be recorded at the following times:
(1) During 2017 to record the sale of the engines.
(2) During 2017 to accrue the contingent loss on warranties.
(3) During 2017 and 2018 to record the actual warranty cost incurred.
b. Assume that Seagul chose not to treat the warranty costs as contingent losses. Instead, it chose to expense warranty costs as they were paid. Compute the total net income for 2017 and 2018 for each of the two accounting treatments.