Carnes Electronics sells consumer electronics that carry a 90-day manufacturers warranty. At the time of purchase, customers are offered the opportunity to also buy a two-year extended warranty for an additional charge. During the year, Carnes received $444,000 for these extended warranties, and on average the warranties were 20% expired by year end.

Required:

1-a. Does this situation represent a loss contingency?

1-b. How should it be accounted for?

2. Prepare journal entries that summarize sales of the extended warranties and recognition of any revenue associated with those warranties.