ASSIGNMENT 1 QUESTION 3

Al's Whole Home Furnishings (AWHF) sells gas ranges to various customers in the province of Saskatchewan. Customers have the option of purchasing a 3-year warranty, which requires the company to provide parts and labour to repair any malfunctioning ranges. Information regarding the company's sale of gas ranges for December 2021 follows:

Number of gas ranges sold (all sales are on account) 900

Selling price per gas range (excluding selling price per warranty)

1950 Selling price per warranty 225

Number of gas ranges on which warranty was sold (all sales are on account) 700

Total estimated cost of parts to be replaced under warranty 40500

Total estimated cost of labour for warranty repairs 58500

In May 2022, AWHF incurred actual warranty costs in the following amounts (all amounts pertain to warranties sold in December 2021):

Parts 4100

Labour 5600

Assume that AWHF maintains an inventory of parts that are used for warranty repairs. Assume also that AWHF uses its own employees to complete warranty repairs. Warranty revenues are recognized based on the proportion of costs incurred out of the total estimated costs.

1. Using the service-type warranty approach, prepare the following journal entries for AWHF for the gas ranges:

(a) The sale of the ranges and related warranties in December 2021. (1.5 marks)

(b) The warranty costs incurred in January 2022. (1.5 marks)

(c) The recognition of warranty revenue in January 2022. (3 marks)

Note: Any required entries for cost of goods sold can be ignored.

2. Using the service-type warranty approach, prepare the following journal entries for AWHF for the gas ranges:

Based on the information provided in the question, how do you know that the service-type warranty approach, rather than the assurance-type approach, is the appropriate method for accounting for this warranty? (1 mark)