Carnes Electronics sells consumer electronics that carry a 90-day manufacturer’s warranty. At the time of purchase, customers are offered the opportunity to also buy a two-year extended warranty for an additional charge. During the year, Carnes received $440,000 for these extended warranties (approximately evenly throughout the year). Required:

1-a. Does this situation represent a loss contingency?

1.b. How should it be accounted for?

2. Prepare journal entries that summarize sales of the extended warranties and any aspects of the warranty that should be recorded during the year.

ANSWER: : )
1a) Does this situation represent a loss contingency? NO

1b) Revenue is deferred as a LIABILITY and warranty expense is computed using the STRAIGHT-LINE BASIS in 2021.

2) Prepare journal entries that summarize sales of the extended warranties and any aspects of the warranty that should be recorded during the year.

Part 1) CASH 440,000

DEFERRED REVENUE - EXTENDED WARRANTIES 440,000

Part 2) DEFERRED REVENUE - EXTENDED WARRANTIES 61,875

REVENUE - EXTENDED WARRANTIES 61,875

440,000*(9/12)= 330,000 to account for the 90 days of manufacturers warranty.

330,000*(4.5/24) = 61,875 4.5 is half of the 9 months; 24 is for the 2 years

You are welcome!

#JmackTheInstructor