QUESTION I

ScreenShine $[$SS$]$ sells several high quality electronic products. One of these is an electronic screen

which it sells at $$3,400$ each with a standard one$-$year warranty. It also sells to its customers a separate

three$-$year extended warranty, commencing after the end of the standard warranty. SS offers its

customers who have purchased such extended warranties 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 the

standard warranty to average $$100$ per screen, being $$60$ for parts and $$40$ for labor. It also expects the

average three$-$year extended warranty costs to be different. Costs for the three$-$year extended warranties

were expected to be $$80$ for parts and $$160$ for labor for each warranty contract. It further assumes that

the warranty costs for the extended warranty contracts will be incurred as follows: $20\%$ in $2022,50\%$ in

$2023$ and the balance in $2024.$ And finally, SS expects to recognize warranty revenues based on the

proportion of warranty costs incurred out of the total estimated costs.

During $2021,$ the company sold $1,200$ screens and $1,080$ extended warranty contracts for cash. During

the year, it incurred some actual costs associated with the standard warranties related to the $2021$ sales

of screens. The cost for parts were $150\%$ of the labor costs. On December $31,2021,$ SS reported the

following:

Current Liabilities:

Estimated Liability Under Warranty $ $61,200$

Unearned Warranty Revenue $$302,400$

SS incurred actual costs, associated with the standard warranties related to the $2021$ sales of screens, in

$2022.$ These amounted to $$70,800$ out of which, overhead costs amounted to $$23,600.$ It further incurred

actual costs associated with the extended warranty contracts which were consistent with what the

company had expected to incur as stated above.

Required:

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

$2.$ Present all journal entries to be prepared, in proper format, in $2021$ in order to record all of the

warranty related transactions and adjustments for $2021.$

$3.$ Present all journal entries to be prepared, in proper format, in $2022$ in order to record all of the

transactions related to the standard warranties of $2021.$

$4.$ Present all journal entries to be prepared, in proper format, in $2022$ in order to record all of the

transactions related to the extended warranties of $2021.$

$5.$ What liabilities related to warranties, would be reported on the December $31,2022$ Balance Sheet.

Show how these would be classified.