Question

On January 2, 2020, Magnus Manufacturing Company, a private company following ASPE, sold machinery with a 2-year warranty against manufacturing defects. Magnus also sold a 2-year extended warranty on these machines. Each machine and warranty is sold on account. Additional information regarding both the sales and warranties follows: $ $ Sale price of each machine Estimated cost of replacement parts per machine under assurance warranty Number of machines sold during 2020 Total repair costs incurred by Magnus Manufacturing during the 2020 year Sale price of extended warranty per machine Number of customers who purchased extended warranty Total repair costs incurred by Magnus Manufacturing during the 2022 year $ 1,978 218 1,004 116,588 428 857 153,217 $ $ Assume that the revenue from the extended warranty is earned evenly over the 2-year contract, and that Magnus has a year end of December 31. Required: 1. Prepare all journal entries required during the 2020 year for the sale of the machines, the warranty costs, and the extended warranty proceeds. Ignore the impact of cost of goods sold in recording your entries. 2. Prepare all journal entries required during the 2022 year for the service-type warranty.

For #2, how do make the J.E as the costs is more than the remaining unearned revenue ( I think).

Answer 1

Year 2020
Particulars	Debit	Credit
Accounts receivable	1985912
To Sales		1985912
(being Machinery sold)
Warranty expense	218872
To estimated warranty liability		218872
(Being cost of warranties estimated)
Accounts receivable	366796
To deferred extended warranty revenue		366796
(being sale of extended warranties for 2 additional years)
Estimated warranty liability	116588
To cash		116588
(being cost incurred on repairs of warranty liability)
Year 2022
deferred extended warranty revenue	183398
To Extended warranty fees		183398
(being reveneue spread evenly over two years)
Warranty repairs expense	153217
To cash		153217
(being cost incurred on repairs of extended warranty)
Assuming
The cost of repairs are incurred that for 2 year warranty already provided along with the product sale
Extended warranty are activated in year 2022
As the question provides spread of reveneue evenly over 2 years contract, the said revenue will be recognised post the end of original warranty of 2 years i.e. after 2021