Question

Kruger Corporation sells construction equipment to a customer for $50,000. The equipment comes with a standard 2-year warranty covering any repairs that are required during that time. It does not cover routine maintenance, and the warranty is voided if the customer does not perform the required routine maintenance as scheduled during the warranty period. Kruger estimates that it costs $1,200 on average to provide warranty repairs over the two-year period for customers who purchase this construction equipment. Kruger offers an extended warranty that covers repairs for years 3 through 10. The price of the extended warranty is $3,000. Kruger estimates that it costs $2,500, on average, to provide the additional repairs required under the extended warranty.

Required: Assuming the customer chooses not to purchase the extended warranty, what journal entry(ies) should Kruger make at the time of the sale? Assuming the customer chooses to purchase the extended warranty, what journal entry(ies) should Kruger make at the time of the sale?

Answer 1

1.

Account Titles	Debit	Credit
Cash	50000
Sales revenue		50000
Warranty expense	1200
Warranty liability		1200

2.

Account Titles	Debit	Credit
Cash	53000
Sales revenue		50000
Unearned revenue		3000
Warranty expense	1200
Warranty liability		1200

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