Service-Type Warranty Problem Revenue Recognition based on % of Completion Denni

Question

Service-Type Warranty Problem Revenue Recognition based on % of Completion Dennis DeNile Windows Inc. sells specialty house windows that will produce a picturesque frost on the panes even in 90-degree weather Because of the complex electronics required, DeNile offers a service-type warranty. good for two years of warranty coverage, effective after the one year assurance warranty on the windows expires The service-type warranty sells for $400 and DeNile estimates that they will have to spend $320 per window to service the warranty contract In 2015, DeNile sold 80,000 of the service-type warranties at $400 apiece along with the specialty windows. The assurance-type warranties on those windows will expire throughout 2016, at which time the service-type warranties will be effective Because the service-type warranties are for two years, the final year for the service- type contracts will be 2018, depending on when, in 2016, the assurance-type warranty expired. DeNile incurred the following costs to fulfill the service-type contracts 2016 $8,960,000 2017 $14,080,000 2018 $17,700,000 (Assurme 60% of the costs are parts and 40% are labor) INSTRUCTIONS Create the entries required in 2015, 2016, 2017, and 2018 to account for the service-type warranties. Use the percent of completion method to calculate the warranty revenue earned each year

Explanation / Answer

2015 -    Dr cash                                $32,000,000

                              Cr Unearned revenue                     $32,000,000

2016 -    Dr Unearned revenue                     $7,040,000 (32,000,000*.22)

                              Cr service type warranty income $7,040,000

               (8,960,000+14,080,000+17,700,000) = $40,740,000

               Percent of completion                            = 8,960,000 * 100 = 22% approx.

                                                                                          40,740,000

2017 -    Dr Unearned revenue                     $11,056,000 (32,000,000*.5655 – 7,040,000)       

                              Cr service type warranty income                $11,056,000

               Percent of compilation                                 = (8,960,000+14,080,000) * 100 = 56.55% approx.

                                                                                                         40,740,000

2018 – Dr Unearned revenue                       $13,904,000 (32,000,000-11,056,000+7,040,000)

                              Cr Service type warranty income                $13,904,000

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.