Question

Problem 1 An entity sells machinery at a price of $9,000. The machinery comes with a one-year warranty at no extra cost to the customer. In addition, an extended warranty is also sold for $3,000 that covers years 2-3. Customers can purchase the extended warranty at any time within the first year of purchase. If a customer purchases the extended warranty at the same time as the machinery, they can purchase it for a total price of $10,300. Expenses incurred in servicing the extended warranty are expected to be incurred relatively evenly over the two-year extended warranty period. Required - Write all journal entries relative to the above for a sale of machinery and extended warranty taking place on January 2, 20x7.

Answer 1

The revenue for the bundled product/service will be allocated based on the ratio of standalone Calculation of allocation of Revenue of $10300: Stand alone Item Revenue per contract Price Machinery $9,000 [($9000 x $10300)/$12000] $7,725 Extended Warraty $3,000 [($3000 x $10300)/$12000] $2,575 $12,000 $10,300 Credit Journal Entry Date Account Title Jan 2, 20X7 Cash Sales Unearned Service Revenue - Warranty Debit $10,300 $7,725 $2,575