Problem #5

Suffolk Industries prepares financials on a calendar year basis and sold on credit a tractor for a total price of $95,000 at the beginning of January 2017 which included both the manufacturer's 3-year manufacturer's warranty and an extended warranty for an additional 3 years after the end of the manufacturer's warranty expires. The extended warranty was $8,700 of the total price.

Suffolk Industries has estimated the manufacturer's 3-year warranty will cause the company to incur costs of $4,000 over the course of the three years. In 2017, Suffolk Industries incurred actual warranty costs relative to the tractor of $1,300, all of which it paid in cash. Suffolk Industries' policy is to record revenue under its extended warranties using the straight line method.

a. Prepare all journal entries necessary for Suffolk Industries in 2017.

b. What entry will Suffolk record to recognize revenue in the first year covered by its

extended warranty?