Gonzalez Equipment Company sold 600 Rollomatics during 2014 at $4,000 each.

During 2014, Gonzalez spent $30,000 servicing the 2-year warranties that accompany

the Rollomatic. All applicable transactions are on a cash basis.

Instructions

(a) Prepare 2014 entries for Gonzalez using the expense warranty approach. Assume

that Gonzalez estimates the total cost of servicing the warranties will be $150,000 for

2 years.

(b) Prepare 2014 entries for Gonzalez assuming that the warranties are not an integral

part of the sale. Assume that of the sales total, $200,000 relates to sales of warranty

contracts. Gonzalez estimates the total cost of servicing the warranties will be

$150,000 for 2 years. Estimate revenues earned on the basis of costs incurred and

estimated costs. (Tips: warranty sold separately is treated as unearned revenue)