Question

On January 1, 2020, Ivanhoe Ltd. sold on account 1,000 units of its product for a total price of $571,000 with a warranty guarantee that the products were free of any defects. The products have a one-year assurance-type warranty and Ivanhoe estimates that the cost will be $26,200. The cost of the units is $471,000. In addition, the company sold extended warranties related to 600 units for a one-year period beyond the one-year assurance period at a cost of $16,700. By the company’s year-end, December 31, 2020, no warranty costs were incurred. By the company’s year-end, December 31, 2021, $9,245 of warranty costs were incurred and paid in cash.

Prepare the appropriate journal entries for 2020 and 2021.

Date Account Titles and Explanation Debit Credit January 1/20 Accounts Receivable 587700 Warranty Expense 26200 Sales Revenue 571000 Unearned Revenue 16700 26200 Warranty Liability (To record the sale) January 1/20 Cost of Goods Sold 471000 Inventory 471000 (To record the cost of goods sold) December 31/20 , No Entry No Entry (To close out unused warranty) December 31/21 Warranty Expense 9245 Warranty Revenue 0 9245 No Entry No Entry (To record warranty costs)

The answers in red boxes are wrong.

Answer 1

Date	Account Titles and Explanation	Debit	Credit
Jan 1/20	Accounts Receivable	587,700
	Warranty expense	26,200
	Sales Revenue		571,000
	Unearned Revenue		16,700
	Warranty Liability		26,200
	(To record the sale)
Jan 1/20	Cost of goods sold	471,000
	Inventory		471,000
	(To record the cost of goods sold)
Dec 31/20	Warrant liability	26,200
	Warranty expense		26,200
	(To close out unused warranty)
Dec 31/21	Unearned Revenue	16,700
	Warranty expense	9,245
	Sales Revenue		16,700
	Cash		9,245
	(To record warranty costs)