Question

Pearl Company sells televisions at an average price of $887 and also offers to each customer a separate 3-year warranty contract for $93 that requires the company to perform periodic services and to replace defective parts. During 2020, the company sold 318 televisions and 238 warranty contracts for cash. It estimates the 3-year warranty costs as $22 for parts and $42 for labor, and accounts for warranties separately. Assume sales occurred on December 31, 2020, and straight-line recognition of warranty revenues occurs.

Record any necessary journal entries in 2020.

What liability relative to these transactions would appear on the December 31, 2020, balance sheet and how would it be classified?

Pearl Company
Balance Sheet (Partial)

Answer 1

Solution-

a)   

Journal Entry

No	Account Titles and Explanation	Debit ($)	Credit ($)
1)	Cash	304200
	To Sales Revenue (318 * 887 )		282066
	To Unearned Warranty Revenue (238 * 93 )		22134

b)

Pearl Company

Balance Sheet ( Partial )

	Amount ($)
Classified as Current Liabilities
Unearned Warranty Revenue (22134 / 3 )	7378
Long term Liabilities
Unearned Warranty Revenue [(22134 * 2) / 3]	14756