Question

Company A sells a luxury automobile for $200,000. A five year all inclusive warranty on this vehicle can be purchased for $20,000 by interested parties up to one year after the purchase date of the car. The car and warranty can be purchased as a package at time of sale for $215,000.

Company A is a publicly accountable enterprise; its year end is December 31. It recognizes revenue annually on the warranty agreement based on the passage of time. The costs of meeting the warranty obligation are expensed when incurred. On January 1, 20X5, Company A sold five of the car/warranty packages to a family. The cost of the vehicles sold, which were in inventory, was $842,000. The cost of meeting the warranty during 20X5, which was paid in cash, totalled $7,000.

Required: Prepare journal entries pertaining to this transaction for January 1, 20X5, and December 31, 20X5, together with a summary journal entry to record the cost of meeting the warranty obligations in 20X5.

Answer 1

Date	Account Titles and Explanation	Debit	Credit
January 1, 20X5	Cash (5 x $215000)	1075000
	Sales revenue (5 x $195650)		978250
	Deferred warranty revenue (5 x $19350)		96750
	(To record sale of car/warranty packages)
January 1, 20X5	Cost of goods sold	842000
	Inventory		842000
	(To record the cost of goods sold)
December 31, 20X5	Deferred warranty revenue	19350
	Warranty revenue ($96750/5 years)		19350
	(To record warranty revenue recognized)
December 31, 20X5	Warranty expense	7000
	Cash		7000
	(To record cost of warranty obligations)

Working:

Performance Obligation	Standalone Selling Price	Percent of Total Standalone Price	Allocated Transaction Price
Sale of car	200000	91%	195650
Sale of warranty	20000	9%	19350
Total	220000	100%	215000

Note: The percentages have been rounded off to the nearest whole amount in the absence of specific instructions. Answers could vary due to any different rounding off. Kindly round off as required. For any clarifications write under the comments section.