Celic Inc. manufactures and sells computers that include an assurancetype warranty for 90 days. Celic offers an optional extended coverage plan under which it will repair or replace any defective part for three years from the expiration of the assurance-type warranty. Because the optional extended coverage plan is sold separately, Celic determines that the three years of the extended coverage represent a separate performance obligation. The total transaction price for the sale of a computer and the extended warranty is $3,600 on October 1, 2020. Celic determines that the stand-alone selling price of each is $3,200 and $400, respectively. Further, Celic estimates, based on historical experience, that it will incur $200 in costs to repair defects that arise within the 90-day coverage period for the assurance-type warranty. The cost of the equipment is $1,440.

Instructions

a. Are the computer and warranties distinct within the contract? Explain.

b. Prepare the journal entry (or entries) to record the cash sale of the computer, cost of goods sold, and liabilities related to the warranties.

c. Briefly describe the accounting for the service-type warranty after the 90-day assurance-type warranty period.