Problem 3 A car dealership also owns a workshop that it uses for servicing cars under warranty In preparing its financial statements, the car dealership needs to ascertain the provision of a one year warranty that it would be required to provide at year end The entity's past experience with warranty claims is as follows 70 of cars sold in a year have zero defects 18 of cars sold in a year have normal defects 12 of cars sold in a year have significant defects The cost of rectifying a normal defect in a car is $3,000 The cost of rectifying a significant defect in a car is $8,000 A total of 800 cars were sold in the year ended December 31, 20x5 Required a) Compute the amount of provision for warranty needed at December 31, 20x5 b) Assume that the car dealership also provides their customers with a two year warranty that starts after the end of regular warranty period The cost of an extended warranty is $3,200 and 300 of the customers who purchased a car in 20x5 also purchased the extended warranty Management believes that the percentage of work done on the extended warranties is 35 in the first year and 65 in the second year Prepare all journal entries with regards to the extended warranty for the years 20x5 20x8 Assume that all sales of cars took place on December 31, 20x5

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Problem 3 A car dealership also owns a workshop that it uses for servicing cars under warranty. In preparing its financial statements, the car dealership

Problem 3

A car dealership also owns a workshop that it uses for servicing cars under warranty. In preparing its financial statements, the car dealership needs to ascertain the provision of a one year warranty that it would be required to provide at year-end. The entity's past experience with warranty claims is as follows:

70% of cars sold in a year have zero defects.
18% of cars sold in a year have normal defects.
12% of cars sold in a year have significant defects.

The cost of rectifying a "normal defect" in a car is $3,000. The cost of rectifying a "significant defect" in a car is $8,000. A total of 800 cars were sold in the year ended December 31, 20x5.

Required -

a) Compute the amount of "provision for warranty" needed at December 31, 20x5.
b) Assume that the car dealership also provides their customers with a two year warranty that starts after the end of regular warranty period. The cost of an extended warranty is $3,200 and 300 of the customers who purchased a car in 20x5 also purchased the extended warranty. Management believes that the percentage of work done on the extended warranties is 35% in the first year and 65% in the second year. Prepare all journal entries with regards to the extended warranty for the years 20x5 20x8. Assume that all sales of cars took place on December 31, 20x5.