Question

Umbrella Corporation sold 700 tractors on January 1, 2006. Umbrella paid $80,000 and $60,000, respectively, during 2006 and 2007 servicing the 3-year warranties that accompany the tractors. The warranties are not an integral part of the sale. Of the total revenues of $4.5 million derived from tractor sales, $450,000 were attributable to the sale of warranties.                  
Umbrella estimated the total cost of servicing the 3-year warranties to be $320,000 as of December 31, 2006 and revised that estimate to $140,000 on December 31, 2007. Umbrella records warranty revenue prorata over the term of servicing the warranties.                  
What is the balance of unearned warranty revenue as of December 31, 2007?                  

Answer 1

Unearned revenue is money received from a customer for work that has not yet been performed. Unearned warranty revenue is a liability for Umbrella Corporation.

$450,000 were attributable to the sale of warranties.

Umbrella paid $80,000 during 2006 for warranty.

Therefore, $450,000-$80,000 = $370,000 is unearned warranty revenue. But, company estimate the total cost of servicing the 3-year warranties to be $320,000 as of December 31, 2006.

Therefore, company will credit $50,000 in statement of profit or loss, it means company will convert $50,000 into revenue from a liability.

During 2007 company paid $60,000 for warranty.

Therefore, $320,000 - $60,000 = $260,000 is unearned warranty revenue. But, company revised the estimate to $140,000 on December 31,2007.

Therefore, $260,000 - $140,000 = $120,000 will be credited to statement of profit or loss.

Hence, balance of unearned warranty revenue as of December 31, 2007 will be $140,000.