Question
Earthlight is a maker of earth moving equipment. The company sells an excavator to firms in the construction industry at $58,000 per unit. Each excavator
Earthlight is a maker of earth moving equipment. The company sells an excavator to firms in the construction industry at $58,000 per unit. Each excavator comes with a two-year warranty.
Earthlight accounts for the warranty as a service-type warranty, and allocates $6,000 of the
$58,000 selling price to the warranty. The company sold 160 units of the excavator in 2013. The company estimatedthat warranty costs would average $4,500 per excavator over two years.
Actual costs incurred by Earthlight to honour warranty claims in 2013 totalled $324,000 ($170,000 for labor, $150,000 for parts and the rest cash). Warranty revenues are recognized each year based on the proportion of warranty costsincurred in the year out of the total estimated costs.
- Prepare journal entries to record the sale of the excavators in 2013, the recognition of warranty revenues, and the use of economic resources to honour warranty claims.
- Assume Earthlight instead accounted for its warranty as an assurance-type warranty. Prepare all necessary journal entries in 2013.
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Servicetype Warranties Date General Journal Debit Credit Date of sale Cash if paid Accounts receiv...Get Instant Access to Expert-Tailored Solutions
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