Eaton Inc. manufactures and sells computers that include an assurance-type warranty for the first 90 days. Eaton offers an optional extended coverage plan under which it will repair or replace any defective part for 3 years from the expiration of the assurance-type warranty. Because the optional extended coverage plan is sold separately, Eaton determines that the 3 years of extended coverage represent a separate performance obligation.

The total transaction price for the sale of a computer and the extended warranty is $2,700 on October 1, 2017, and Eaton determines the standalone selling price of each is $2,400 and $300, respectively. Further, Eaton estimates, based on historical experience, it will incur $200 in costs to repair defects that arise within the 90-day coverage period for the assurance-type warranty. The cost of the equipment is $1,100.

Instructions

(a) Prepare the journal entry (ies) to record the sale of the computer, cost of goods sold, and liabilities related to the warranties.

(b) Briefly describe the accounting for the service-type warranty after the 90-day assurance-type warranty period.