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Question 6 Pharoah Corp. manufactures a wide range of equipment. The company’s biggest seller is the...

Question 6

Pharoah Corp. manufactures a wide range of equipment. The company’s biggest seller is the Whatchamacallit, which sells for $4,700 each. Starting in 2020 Whatchamacallit now carries with it a 2-year warranty against manufacturing defects. In addition to this warranty, customers can purchase an optional extended warranty for $1,510 extra that extends the Whatchamacallit’s warranty an additional 2 years. From experience with similar products, Pharoah Corp. has determined that each Whatchamacallit sold will average $1,010 in replacement parts (ignore labour costs for repairs). In 2020, the company sells 580 Whatchamacallits; 280 of these customers decide to purchase the optional extended warranty. Assuming the revenue is earned evenly over the two-year contract. Also in 2020, the company incurred $165,000 in total repair costs (replacement parts out of inventory).

Prepare the journal entry to record the sale of the Whatchamacallits and the extended warranties (sales would take place throughout the year; prepare only one entry at December 31, 2020 for the total sales). Ignore any cost of goods sold entry. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation

Debit

Credit

Prepare the 2020 journal entries related to the product warranties using the expense approach. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation

Debit

Credit

(To record warranty expense)

(To accrue warranty expense)

Assuming that the extended warranty period begins January 1, 2022 for all customers who purchased the extended warranty, prepare the journal entries at December 31, 2022 for the extended warranty. Assume that $213,900 in warranty costs were incurred in 2022. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation

Debit

Credit

(To record warranty revenue)

(To record warranty expense)

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Answer #1

1.

Prepare the journal entry to record the sale of the Whatchamacallits and the extended warranties

Credit Debit $3,194,100 Account Titles Cash Sales Revenue (580 x $4.700) Unearned warranty income (310 x $1,510) $2,726,000 $

___________________________________________________________________

2.

Prepare the 2020 journal entries related to the product warranties using the expense approach.

Credit Account Titles Warranty Expense Accounts payable Debit $165,000 $165,000 $420,800 Warranty Expense Warranty Liability

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