Question

Glen Arbor Corporation sells DVD players. The corporation also offers its customers a 4-year service- type warranty contract. On 1/1/17, Glen Arbor sold 20,000 warranty contracts at $99 each and spent $180,000 servicing warranties during 2017 and $200,000 servicing warranties in 2018. Estimated warranty expense for the four-year period is $800,000. The Sales Warranty (Deferred Revenue) approach is applicable. Assume straight-line amortization. What is the Unearned Warranty Revenue balance at 12/31/18? Select one: a. $1,485,000 b. $990,000 c. $1,600,000 d. $610,000 e. $1,980,000

Answer 1

Solution:

Total Warranty revenue to be recognized over the period of 4 years = 20000*$99 = $1,980,000

Warranty revenue recognized till 2018 = $1,980,000*2/4 = $990,000

Unearned warranty revenue balance on 31.12.2018 = $1,980,000 - $990,000 = $990,000

Hence option b is correct.