Question
Kingbird Inc. manufactures and sells computers that include an assurance-type warranty for 90 days. Kingbird offers an optional extended coverage plan under which it will
Kingbird Inc. manufactures and sells computers that include an assurance-type warranty for 90 days. Kingbird offers an optional extended coverage plan under which it will repair or replace any defective part for three years from the expiration of the assurance-type warranty. Because the optional extended coverage plan is sold separately, Kingbird determines that the three years of the extended coverage represent a separate performance obligation. The total transaction price for the sale of a computer and the extended warranty is $3,400 on October 1, 2017, and Kingbird determines the stand-alone selling price of each is $3,000 and $400, respectively. Further, Kingbird estimates, based on historical experience, it will incur $150 in costs to repair defects that arise within the 90-day coverage period for the assurance-type warranty. The cost of the equipment is $1,240. Kingbird Inc. makes only cash sales.
(a)
Prepare the journal entries to record the sale of the computer, cost of goods sold, and liabilities related to the warranties.
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