Cole Electronikz, Inc., also distributes computers produced by a national manufacturer. Cole guarantees its products for the period from the date of purchase to the end of the year of purchase with an assurancetype warranty issued by the manufacturer. Thus for example, a computer purchased on August 1, 2017 would be covered till December 31, 2017 with the manufacturer’s assurance-type contract. Since Cole will be reimbursed by the manufacturer for all repair costs incurred during this period, it makes no provisions for liabilities on this contract. Further, it also offers an extended service-type warranty contract covering all repair costs, including parts and labor, for a 3-year period commencing on January 1 of the year following the year of purchase. Thus for example, a computer purchased on August 1, 2017 with an extended warranty contract will be covered for the 3-year period commencing January 1, 2018. This extended contract is optional and the customer can buy it by paying an additional amount of $200 at the time of purchasing the computer. The company estimates that the service-type warranty will be used 40% in the first year of coverage, 35% in the second year, and 25% in the third year of the contract coverage. During 2017, the year in which the computers were sold, the company also sold 10,000 service-type warranties at a cash price of $200 per contract. During the following year, the company incurred $45,000 in actual warranty claims that are now covered only under the service-type warranty contracts. The repair costs consisted of $31,000 in parts issued by Cole and $14,000 in labor costs which were paid in cash to Joe Fix-O. Cole did not incur any actual repair costs in 2017 on the sales covered by the assurance-type warranty.

REQUIRED:

1. Present all journal entries to be prepared, in proper format, in 2017 in order to record all of the warranty related transactions and adjustments for 2017.

2. Present all journal entries to be prepared, in proper format, in 2018 in order to record all of the transactions related to the extended warranty contracts that were sold in 2017.

3. What would be the gross profits for 2018 reported by Cole on the extended warranties?

4. Present the journal entries to be prepared, in proper format, in 2019 in order to record only the revenues related to the extended warranties of 2017. 5. How would the extended warranty liabilities be reported, showing the amounts and how would these be classified, on the Balance Sheets dated

(i) December 31, 2017?

(ii) December 31, 2018?

(iii) December 31, 2019?

(iv) December 31, 2020?