Early in 2017, Indigo Equipment Company sold 500 Rollomatics during 2017 at $6,3

Question

Early in 2017, Indigo Equipment Company sold 500 Rollomatics during 2017 at $6,300 each. During 2017, Indigo spent $21,000 servicing the 2-year assurance warranties that accompany the Rollomatic. All applicable transactions are on a cash basis.

Prepare 2017 entries for Indigo. Assume that Indigo estimates the total cost of servicing the warranties will be $52,000 for 2 years. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Date

Account Titles and Explanation

Debit

Credit

Prepare 2017 entries for Indigo assuming that the warranties are not an integral part of the sale (a service-type warranty). Assume that of the sales total, $53,000 relates to sales of warranty contracts. Indigo estimates the total cost of servicing the warranties will be $52,000 for 2 years. Estimate revenues to be recognized on a straight-line basis. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually. Round intermediate calculations to 5 decimal places, e.g. 1.54657 answers to 0 decimal places, e.g. 5,125.)

(To record warranty revenue)

Explanation / Answer

Solution 1 - Journal Entry (Warranty Expenses Approach)

Solution 2 - Journal Entry (Warranty non integral Part Method)

Date Accounts Title and Explanation Debit Credit During 2017 Cash $3150000 Sales Revenue $3150000 (Being Sales revenue booked = 6300*$500) During 2017 Warranty Expenses $21000 Cash $21000 (Warranty expenses Incurred) During 2017 Warranty expenses $31000 Estimated Liability Warranty $31000 (Net Estimate of service cost = $52000 - $21000 = $31000)

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