Smythe Corporation sells televisions at an average price of $850. The televisions come with a standard one-year warranty. Ignore any cost of goods sold. Smythe 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 2023, Smythe 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, 2023, and that all warranty costs are expected to be incurred evenly over the warranty period. Smythe uses the assurance-type approach for the one-year warranty and the service-type approach for the extended warranty contracts.

Instructions

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

a. Record any necessary journal entries in 2023.

b. What liabilities relative to these transactions would appear on the December 31, 2023 SFP? How would they be classified?

Answer parts (c) and (d) assuming that in 2024 Smythe incurred actual costs relative to 2023 television warranty sales of $4,410 for parts and $2,940 for labour.

c. Record any necessary journal entries in 2024 relative to the 2023 television warranties.

d. What amounts relative to the 2023 television warranties would appear on the December 31, 2024 SFP? How would they be classified?

Answer parts (e) and (f) assuming that in 2025 Smythe incurred the following costs relative to the extended warranties sold in 2023: $2,000 for parts and $3,000 for labour.

e. Record any necessary journal entries in 2025 relative to the 2023 television warranties.

f. What amounts relative to the 2023 television warranties would appear on the December 31, 2025 SFP? How would they be classified?

g. You are a potential investor and see warranty liability accruals on the SFP of the business you are interested in. The business includes warranties in the selling prices of its products and it accounts for these warranties using the assurance-type method. You have heard of numerous product recalls by competitors of the company you have selected. Are the costs of these product recalls included in the amount accrued for product warranties?