Question

Leppard Corporation Sells DVD players. The corporation also offers its customers a 4-year warranty contract. During 2017, Leppard sold 20,000 warranty contracts at \(99 each. The corporation spent \)180,000 servicing warranties during 2017. Prepare Leppard’s journal entries for (a) the sale of contracts, (b) the cost of servicing the warranties, and (c) the recognition of warranty revenue. Assume the service costs are inventory costs.

Short answer

Unearned Warranty Revenue $1980,000

Warranty Expenses $180,000

Unearned Warranty Revenue $495,000

Step-by-step solution

Meaning of Warranty

A warranty refers to a written guarantee issued to the buyer of a product by its manufacturer for agreeing to repair or replace it. The warranty term usually begins at the date of purchase. The form of warranty is a written promise.

Leppard’s Journal Entries

(a) the sale of contracts

Date	Account Titles and Explanations	Debit	Credit
(a)	Cash	$1,980,000
	Unearned Warranty Revenue		$1,980,000
	(To record the sale of contracts)

(b) the cost of servicing the warranties

Date	Accounts Titles and Explanations	Debit	Credit
(b)	Warranty Expenses	$180,000
	Inventory		$180,000
	(To record the cost of servicing the warranties)

(c) the recognition of warranty revenue

Date	Accounts Titles and Explanations	Debit	Credit
(c)	Unearned Warranty Revenue	$495,000
	Warranty Revenue		$495,000
	(To record the recognition of warranty revenue)

Working notes:

$\begin{array}{rcl}\mathbf{Unearned}\mathbf{}\mathbf{Warranty}\mathbf{}\mathbf{Revenue}& \mathbf{=}& \mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Warranty}\mathbf{}\mathbf{Contracts}\mathbf{\times }\mathbf{Contract}\mathbf{}\mathbf{Price}\\ & \mathbf{=}& \mathbf{20}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{\$}\mathbf{99}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{980}\mathbf{,}\mathbf{000}\end{array}$

$\begin{array}{rcl}\mathbf{Warranty}\mathbf{}\mathbf{Revenue}& \mathbf{=}& \frac{\mathbf{Unearned}\mathbf{}\mathbf{Warranty}\mathbf{}\mathbf{Revenue}}{\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Years}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{980}\mathbf{,}\mathbf{000}}{\mathbf{4}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{495}\mathbf{,}\mathbf{000}\\ & & \end{array}$