Question

The Ciccollini Corporation sells a product for a stand-alone price of $2,000. The company also sells a three year extended warranty for a stand-alone price of $800. The extended warranty starts at the end of the regular warranty (included in the price) and ends at the end of the fourth year after the product was purchased. Customers have until the end of the first year to purchase the extended warranty. If a customer purchases the extended warranty at the same time as they purchase the product, they can purchase both for $2,600. Ciccollini estimates that the expenses incurred on servicing the extended warranty will be incurred evenly over the extended warranty period.

Assume a customer purchases a unit of product with the extended warranty on January 2, 20x6. Write the journal entries related to this purchase for the period January 2, 20x6 to December 31, 20x8.

Answer 1

	Journal Entries in the books of Ciccollini Corporation
DATE	PARTICULARS	DEBIT AMT	CREDIT AMT
02 Jan 20x6	cash a/c	2600
	to sales		2000
	to advance received		600
	[ being cash received for sale of product along with extended warranty for 3 yrs]
2/1/20x7	advance received a/c	200
	to sales		200
	[being extended warranty of 3 years started for customer xyz]
2/1/20x8	advance received a/c	200
	to sales		200
	[ being extended warranty for 2nd out of 3 years inoviced]
2/1/20x9	advance received a/c	200
	to sales		200
	[ being extended warranty of 3rd year inoviced]