Question
Blue Spruce Corp. provides at no extra charge a two-year warranty with one of its products, which was first sold in 2020. In that year,
Blue Spruce Corp. provides at no extra charge a two-year warranty with one of its products, which was first sold in 2020. In that year, Blue Spruce sold products for $ 2.38 million and spent $ 68,500 servicing warranty claims. At year end, Blue Spruce estimates that an additional $ 511,500 will be spent in the future to service warranty claims related to the 2020 sales. Prepare entries for the warranty that recognize the sale as a multiple deliverable with the warranty as a separate service that Blue Spruce bundled with the selling price of the product. Ignore any cost of goods sold entry. Sales in 2020 occurred evenly throughout the year. Warranty agreements similar to this are available separately, are estimated to have a stand-alone value of $ 630,500, and are earned over the warranty period as follows: 2020 - 25%, 2021 - 50%, and 2022 - 25%. Also prepare the entries to record the $ 68,500 expenditure for servicing the warranty during 2020, and the adjusting entry required at year end, if any, under the revenue approach used for service-type warranties. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
Date | Account Titles and Explanation | Debit | Credit |
2020 | Interest ExpenseSales RevenueWarranty RevenueCashWarranty ExpenseNo EntryMaterials, Cash, PayablesUnearned Revenue | ||
CashUnearned RevenueMaterials, Cash, PayablesWarranty ExpenseInterest ExpenseSales RevenueWarranty RevenueNo Entry | |||
Sales RevenueMaterials, Cash, PayablesInterest ExpenseNo EntryCashWarranty ExpenseUnearned RevenueWarranty Revenue | |||
(To record cash sale) | |||
2020 | Sales RevenueWarranty RevenueWarranty ExpenseInterest ExpenseCashMaterials, Cash, PayablesNo EntryUnearned Revenue | ||
No EntryWarranty ExpenseWarranty RevenueMaterials, Cash, PayablesUnearned RevenueInterest ExpenseSales RevenueCash | |||
(To record warranty expense) | |||
Dec. 31, 2020 | Sales RevenueNo EntryMaterials, Cash, PayablesWarranty RevenueInterest ExpenseWarranty ExpenseUnearned RevenueCash | ||
Materials, Cash, PayablesInterest ExpenseUnearned RevenueNo EntryWarranty RevenueSales RevenueCashWarranty Expense | |||
(To record year-end adjustment) |
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