Question

Dos Passos Company sells televisions at an average price of \(900 and also offers to each customer a separate 3-year warranty contract for \)90 that requires the company to perform periodic services and to replace defective parts. During 2017, the company sold 300 televisions and 270 warranty contracts for cash. It estimates the 3-year warranty costs as \(20 for parts and \)40 for labor, and accounts for warranties separately. Assume sales occurred on December 31, 2017, and straight-line recognition of warranty revenues occurs.

Instructions

(a) Record any necessary journal entries in 2017.

(b) What liability relative to these transactions would appear on the December 31, 2017, balance sheet and how would it be classified?

In 2018, Dos Passos Company incurred actual costs relative to 2017 television warranty sales of \(2,000 for parts and \)4,000 for labor.

(c) Record any necessary journal entries in 2018 relative to 2017 television warranties.

(d) What amounts relative to the 2017 television warranties would appear on the December 31, 2018, balance sheet and how would they be classified?

Short answer

(a) Cash will be debited by $294,300 and unearned warranty revenue will be credited by $24,300, and sales revenue by $270,000.

(b)Unearned warranty revenue of $8,100 in current liabilities, and $16,200 in long-term liabilities

(c) Unearned warranty revenue will be debited and warranty revenue will be credited by $8,100, respectively.

Warranty expense will be debited by $6,000, inventory will be credited by $2,000 and salaries and wages payable will be credited by $4,000.

(d) Unearned warranty revenue of $8,100 in current liabilities, and $8,100 in long-term liabilities

Step-by-step solution

(a) Journal entry

Date	Accounts & Explanations	Debit	Credit
Dec.31,2017	Cash (300 x $900)+(270 x $90)	$294,300
	Unearned Warranty Revenue		$24,300
	Sales revenue		$270,000
	To record sales revenue and unearned warranty revenue

(b) Partial balance sheet

Current Liabilities
Unearned Warranty Revenue ($24,300 / 3)	$8,100
Long-term Liabilities
Unearned Warranty Revenue ($24,300 x 2/3)	$16,200
Total	$24,300

(c) Journal entry

Date	Accounts & Explanations	Debit	Credit
2018	Unearned Warranty Revenue	$8,100
	Warranty revenue ($24,300 / 3)		$8,100
	To record warranty revenue
2018	Warranty Expense	$6,000
	Inventory		$2,000
	Salaries and Wages Payable		$4,000
	To record warranty expense

(d) Partial balance sheet

Current Liabilities
Unearned Warranty Revenue ($24,300 / 3)	$8,100
Long-term Liabilities
Unearned Warranty Revenue ($24,300 - $8,100 - $8,100)	$8,100
Total	$16,200