During 1996 Seagul Outboards sold 200 outboard engines for $250 each. The engines are under a one-year warranty for parts and labor, and from past experience, the company esti¬ mates that, on average, warranty costs will equal $20 per engine. As of December 31, 1996, 50 engines had been serviced at a total cost of $1,400. During 1997 engines were serviced at a total cost of $2,600. Assume that all repairs used cash. REQUIRED:

a. Prepare the journal entries that would be recorded at the following times: (1) During 1996 to record the sale of the engines. 516 Part 4 Liabilities and Stockholders’ Equity: A Closer Look El 0-13 (Appendix 10A: Pension contributions and unfunded pension liability) El 0-14 (Appendix 10B: Deferred taxes and the tax rate) El 0-15 (Appendix 10B: conservatism ratio) (2) During 1996 to accrue the contingent loss on warranties. (3) During 1996 and 1997 to record the actual warranty cost incurred.

b. Assume that Seagul chose not to treat the warranty costs as contingent losses. Instead, they chose to expense warranty costs as they were paid. Compute the total net income for 1996 and 1997 for each of the two accounting treatments.