QUESTION I

Company sells for $5,100 per unit and which comes with a standard one-year warranty. The company also offers its customers a separate three-year extended warranty, commencing after the end of the standard warranty, at an additional charge. Under this extended warranty, SNT offers its customers a service, when necessary, to perform either appropriate repairs or to replace the defective unit.

The total warranty costs for the standard warranty to average $150 per unit, being $90 for parts and $60 for labor. It also expects the average three-year extended warranty costs to be $240 for parts and $480 for labor for each contract. It further assumes that the warranty costs for the extended warranty contracts will be incurred as follows: 20% in 2012, 50% in 2013 and the balance in 2014. And finally , they will recognize warranty revenues based on the proportion of costs incurred out of the total estimated costs.

During 2011, the company sold 6,000 units and 5,400 extended warranty contracts for cash. During the year, it also incurred some actual costs associated with the standard warranties related to the 2011 sales of units. The cost for parts were 150% of the labor costs. On December 31, 2011, reported the following:

Current Liabilities included: Estimated Liability Under Warranty $459,000 and Unearned Warranty Revenue $4,536,000

Actual costs associated with the standard warranties related to the 2011 sales of units, in 2012 amounting to $531,000 and the cost for parts therein amounted to $354,000. It further incurred actual costs associated with the extended warranty contracts which were consistent with what the company had expected to incur.

Required:

1. Determine the selling price for each extended warranty contract.

2. Present all journal entries to be prepared, in proper format, in 2011 in order to record all of the warranty related transactions and adjustments for 2011.

3. Present all journal entries to be prepared, in proper format, in 2012 in order to record all of the transactions related to the standard warranties of 2011.

4. Present all journal entries to be prepared, in proper format, in 2012 in order to record all of the transactions related to the extended warranties of 2011.

5. What liabilities related to warranties, would be reported on the December 31, 2012 Balance Sheet. Show how these would be classified.