QUESTION I

KleerView [KW] sells several high quality electronic products. One of these is an electronic screen which it sells at $1,700 each with astandardone-year warranty. It also sells to its customers a separate three-yearextendedwarranty, commencing after the end of the standard warranty.KWoffers its customers who have purchased suchextendedwarranties a service, when necessary, to perform either appropriate repairs or to replace the defective unit.

The company estimates, based upon its experience from prior years, the total warranty costs for thestandardwarranty to average $50 per screen, being $30 for parts and $20 for labor. It also expects the average three-yearextendedwarranty costs to be $80 for parts and $160 for labor for each contract. It further assumes that the warranty costs for theextendedwarranty contracts will be incurred as follows: 20% in 20X2, 50% in 20X3 and the balance in 20X4. And finally ,KWexpects to recognize warranty revenues based on the proportion of costs incurred out of the total estimated costs.

During 20X1, the company sold 600 screens and 540extendedwarranty contracts for cash. During the year, it also incurred some actual costs associated with thestandardwarranties related to the 20X1 sales of screens. The cost for parts were 150% of the labor costs. On December 31, 20X1,KWreported the following:

Current Liabilities:

Estimated Liability Under Warranty $ 15,300

Unearned Warranty Revenue $151,200

KWincurred actual costs associated with thestandardwarranties related to the 20X1 sales of screens, in 20X2 amounting to $17,700 and the cost for parts therein amounted to $11,800. It further incurred actual costs associated with theextendedwarranty contracts which were consistent with what the company had expected to incur.

Required:

1. Determine the selling price for eachextendedwarranty contract.
2. Present the l journal entries to be prepared,in proper format, in 20X1 in order to record all of the warranty related transactions and adjustments for20X1.
3. Present the journal entries,in proper format, in 20X2 in order to record all of the transactions related to the standard warranties of20X1.
4. Present the journal entries to be prepared,in proper format, in 20X2 in order to record all of the transactions related to the extended warranties of20X1.
5. What liabilities related to warranties, would be reported on the December 31, 20X2 Balance Sheet. Show how these would be classified.