Question

Carnes 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 $422,000 for these extended warranties (approximately evenly throughout the year).
  
1.). Prepare journal entries that summarize sales of the extended warranties (assume all credit sales) and any aspects of the warranty that should be recorded during the year.

Prepare journal entries that summarize sales of the extended warranties (assume all credit sales) 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.)

Answer 1

1:- JOURNAL ENTRY FOR THE SALE OF EXTENDED WARANTIES :- THE SUM OF ALL TRANSACTION

Date. Description. Debit. Credit • During the

Year Accounts Receivable....Dr $422,000

To Unearned revenue --extended

warranties $422,000

-->> Then, what about the adjustment entry for the extended warranties on Dec 31?

• The original warranty expires in 90 days. So, there are some sales relying on the extended warranties. So, we need to recognize the earned revenue.

• Factor 1: two-year extended warranties: $422,000 x ½ = $211,000/year.

• Factor 2: sales of products are made evenly throughout the year. Equally speaking, the extended warranty of $211,000 exists for six months (half year).

• Factor 3: Extended warranties start after the 90-day period of the original warranty for each sale. Equally speaking, $211,000 exits for (6-3)=3 months.

• $211,000 x 3/12 = $52,750

Date. Description. Debit Credit. • 12/31. Unearned revenue

-extended warranties...Dr. $52,750

To Revenue-extended warranties. $52,750