Velocity Vehicles Inc. has sold motorized scooters for a number of years and follows ASPE. As of $2020,$ Velocity Vehicles decided to include a free warranty on each scooter to remain competitive on a national basis. The warranty covers repair costs for a duration of $2$ years, from date of sale. Management estimates that the cost of providing the warranty is $$100$ per unit sold. Other facts are as follows:

$-$ Velocity Vehicles' sales totaled $25,000$ units in $2020$ and $35,000$ units in $2021$ with a selling price of $$1,000$ per unit. All sales were on credit.

$-$ Actual warranty costs incurred in $2020$ amounted to $$750,000$ and it is expected that the remaining warranty costs will be incurred in $2021.$ In $2021,$ the total actual warranty costs amounted to $$3,400,000($this included warranty costs from sales made in $2020$ and $2021).$

$-$ Velocity Vehicles is considering going public in $2021.$ Based on similar transactions, $5\%$ of the sales price would be allocated to warranty sales.

Under an assurance$-$type warranty, the warranty liability balances at year$-$end would be:

Question $6$Answer

a$.$

None

b$.$

$2020$: $$1,750,000$; $2021$: $$100,000$

c$.$

$2020$: $$2,500,000$; $2021$: $$3,500,000$

d$.$

$2020$: $$1,750,000$; $2021$: $$1,850,000$

e$.$

$2020$: $$750,000$; $2021$: $$3,400,000$

Assume for this part that Velocity Vehicles follows the warranty revenue approach at the start of $2020,$ to facilitate its transition when it goes public. Given repair costs are not evenly distributed over the two$-$year contract term, revenue recognition follows the cost$-$incurred trend. What would be the ending balances of unearned warranty revenue in $2020$ and $2021?$

Question $7$Answer

a$.$

None

b$.$

$2020$: $$625,000$ ; $2021$: $$1,500,000$

c$.$

$2020$: $$875,000$ ; $2021$: $$925,000$

d$.$

$2020$: $$625,000$ ; $2021$: $$875,000$

e$.$

$2020$: $$875,000$ ; $2021$: $$50,000$