You have recently been hired as an Accountant for Arizona Corp., a manufacturer of equipment. Arizona follows ASPE but is considering becoming a public company in the next year. Arizona provides a 2-year warranty on its equipment sales and you are examining whether to treat the warranty as a Service-type or Assurance-type warranty for accounting purposes. Revenue would be realized on a straight-line basis if the Service-type approach is followed. Your research has uncovered the following data for 2020: Sales 50 units at $7,500 each (for simplicity assume all are cash sales and occur on January

1) Estimated warranty costs $700 per unit Actual 2020 costs incurred $25,000 Fair value of warranty $800 per unit.

a) For both the Service-type and Assurance-type approaches, prepare all necessary journal entries for 2020.

b) Which approach is preferable? Support your conclusion with applicable account balances.