What are the two types of warranties? Explain the accounting for each type.
There are two types of warranties:
Warranty is a type of assurance given by a manufacturer or other third party to a product based on certain conditions. It also refers to the conditions and circumstances under which the product will be repaired or exchanged if it does not work as claimed or intended
The following are the two types of warranties:
(a) Assurance-type warranty: At the time of sale, the product is warranted to satisfy the contract's agreed-upon specifications. This sort of guarantee is sometimes referred to as an assurance-type warranty since it is included in the purchase price of a company's goods.
(b) Service-type warranty: Warranties beyond the assurance-type guarantee and include extra services. This guarantee is referred to as a service-type warranty because it is not included in the product's purchase price. As a result, it is recorded separately as a performance obligation.
(Allocate Transaction Price, Modification of Contract) Refer to the Tablet Bundle A revenue arrangement in P18-1. In response to competitive pressure for Internet access for Tablet Bundle A, after 2 years of the 3-year contract, Tablet Tailors offers a modified contract and extension incentive. The extended contract services are similar to those provided in the first 2 years of the contract. Signing the extension and paying $90 (which equals the standalone selling of the revised Internet service package) extends access for 2 more years of Internet connection. Forty Tablet Bundle A customers sign up for this offer.
(a) Prepare the journal entries when the contract is signed on January 2, 2019, for the 40 extended contracts. Assume the modification does not result in a separate performance obligation.
On March 1, 2017, Parnevik Company sold goods to Goosen Inc. for $660,000 in exchange for a 5-year, zerointerest-bearing note in the face amount of $1,062,937 (an inputed rate of 10%). The goods have an inventory cost on Parnevik’s books of $400,000. Prepare the journal entries for Parnevik on (a) March 1, 2017, and (b) December 31, 2017.
Shaw Company sells goods that cost $300,000 to Ricard Company for $410,000 on January 2, 2017. The sales price includes an installation fee, which has a standalone selling price of $40,000. The standalone selling price of the goods is $370,000. The installation is considered a separate performance obligation and is expected to take 6 months to complete.
(a) Prepare the journal entries (if any) to record the sale on January 2, 2017.
(Recognition of Profit on Long-Term Contracts) During 2017, Nilsen Company started a construction job with a contract price of $1,600,000. The job was completed in 2019. The following information is available.
2017 2018 2019
Costs incurred to date $400,000 $825,000 $1,070,000
Estimated costs to complete 600,000 275,000 –0–
Billings to date 300,000 900,000 1,600,000
Collections to date 270,000 810,000 1,425,000
(b) Prepare all necessary journal entries for 2018.
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