Exercise 13-11

Early in 2017, Larkspur Equipment Company sold 600 Rollomatics during 2017 at $5,700 each. During 2017, Larkspur spent $20,000 servicing the 2-year assurance warranties that accompany the Rollomatic. All applicable transactions are on a cash basis.

Part 1: Prepare 2017 entries for Larkspur. Assume that Larkspur estimates the total cost of servicing the warranties will be $57,000 for 2 years.

During 2017: Debit warranty expense 20,000 and credit ???? 20,000 ***Answer is NOT cash***

Part 2: Prepare 2017 entries for Larkspur assuming that the warranties are not an integral part of the sale (a service-type warranty). Assume that of the sales total, $58,000 relates to sales of warranty contracts. Larkspur estimates the total cost of servicing the warranties will be $57,000 for 2 years. Estimate revenues to be recognized on a straight-line basis.

12/31/17:

To record warranty revenue: Debit unearned warranty liability ??? and credit warranty revenue ???

To record warranty liability: Debit warranty expense ??? and credit warranty liability ???