On December 31, 2014, Grando Company sells production equipment to Fargo Inc. fo

Question

On December 31, 2014, Grando Company sells production equipment to Fargo Inc. for $145,000. Grando includes a 1-year assurance warranty service with the sale of all its equipment. The customer receives and pays for the equipment on December 31, 2014. Grando estimates the prices to be $141,520 for the equipment and $3,480 for the cost of the warranty.

a) Prepare the journal entry to record this transaction on December 31, 2014.

b) Repeat the requirements for (a), assuming that in addition to the assurance warranty, Grando sold an extended warranty (service-type warranty) for an additional 2 years (2016–2017) for $2,320.

Explanation / Answer

(a) On December 31, 2014:

          Cash or Bank A/c                              Dr $145,000

   Warranty Expense A/c               Dr $3,480

            Warranty Liability A/c                       Cr $3,480

            Equipment A/c                                  Cr $145,000

(Being amount received on sale of production equipment with 1 year assurance warranty service)

(b) On December 31, 2014:

              Cash or Bank A/c                              Dr $147,320

Warranty Expense A/c                    Dr $3,480

                   Warranty Liability A/c                     Cr $3,480

                   Equipment A/c                                Cr $145,000

                   Unearned service revenue         Cr $2,320

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