Question

Cames Electronics sells consumer electronics that carry a 90-day manufacturer's warranty. At the time of purchase, customers are offered the opportunity to also buy a two-year extended warranty for an additional charge. During the year, Carnes received $440,000 for these extended warranties (approximately evenly throughout the year) Required: 1-0. Does this situation represent a loss contingency? 1.b. How should it be accounted for? 2. Prepare journal entries that summarize sales of the extended warranties and any aspects of the warranty that should be recorded during the year. Complete this question by entering your answers in the tabs below. Reg 1A Prepare journal entries that summarize sales of the extended warranties and any aspects of the warranty that should be recorded during the year. (If no entry is required for a transaction/event, select "No journal entry required in the first account field. Round your answers to 2 decimal places.) View transaction list View journal entry worksheet No Event Credit General Journal Cash Deferred revenue extended warranties Debit 140 000 00 440,000.00 Deferred revenue ended warranties Revenuextended warranties (Reg 1B

Answer 1

Solution 1a:

Loss Contingency = No

Solution 1b:

Revenue is deferred as a liability and warranty expense is computed using the straight line basis.

Solution 2:\

Carnes Electronics
Date	Particulars	Debit	Credit
1	Cash	$4,40,000
	Deferred Revenue- Extended Warranties		$4,40,000
2	Deferred Revenue- Extended Warranties ($440000*4.5/24 months)	$82,500
	Revenue- Extended Warranties		$82,500