Aaron Corp sells prefabricted playsets. Each playset sells for $20,000 (cost of $8,000). Aaron also offers a 5-year extended warranty for $500/playset, and each playset is expected to require warranty costs of $40 per year on average. Aaron sold 20 playsets on account to the City of Regina at December 31, 2020 for parks and schoolgrounds. The City of Regina paid their account in full in 2021 and required $560 of warranty work: $300 in materials and $260 in labour. The company maintains a supply of materials (materials inventory) and charges all labour to expense.

Required:

(a) 10 marks Using a revenue-based approach, and assuming that the City of Regina purchased the full extended warranty, provide journal entries for (i) the sale of playsets and extended warranty in 2020, and (ii) the payment and warranty in 2021.

(b) 3 marks What if the $500/playset warranty wasn't an extended warranty and was therefore accounted for using the expense-based approach? What balances would be shown on the December 31, 2021 Statement of Financial Position for warranty liability?