Question

Talarczyk Company sold 10,000 Super-Spreaders on December 31, 2017, at a total price of \(1,000,000, with a warranty guarantee that the product was free of any defects. The cost of the spreaders sold is \)550,000. The assurance warranties extend for a 2-year period and are estimated to cost \(40,000. Talarczyk also sold extended warranties (service-type warranties) related to 2,000 spreaders for 2 years beyond the 2-year period for \)12,000. Given this information, determine the amounts to report for the following at December 31, 2017: sales revenue, warranty expense, unearned warranty revenue, warranty liability, and cash.

Short answer

Sales revenue = $1,000,000; Warranty expense = $40,000; Unearned warranty revenue = $12,000; Warranty liability = $40,000; Cash = $1,012,000.

Step-by-step solution

Meaning of Service-Type Warranties

Extra services are included in warranties that go beyond the assurance-type guarantee. Because it is not included in the product's purchase price, this assurance is referred to as a service-type warranty. As a result, it is recorded as a performance obligation individually.

Calculation of sales revenue, warranty expense, unearned warranty revenue, warranty liability, and cash

At the price of $1,000,000 Talarczyk sold super-spreaders that means,

Sales Revenue will be $1,000,000.

Talarczyk extends the assurance warranties and the cost estimate for this is $40,000 that means,

Warranty Expense will be $40,000.

Extended warranties were also sold by Talarczyk which are service-type warranties for $12,000 that means,

Unearned Warranty Revenue will be $12,000.

Warranty Liability will be $40,000

Talarczyk receives $1,000,000 as total price by selling super-spreaders and also receive $12,000 by selling extended warranties which is also an unearned warranty revenue, that means,

$$\begin{gathered} \mathrm{Cash}=\mathrm{Total}\mathrm{price}+\mathrm{Unearned}\mathrm{warranty}\mathrm{revenue} \\ =\$1,000,000+\$12,000 \\ =\$1,012,000 \end{gathered}$$