Reference no: EM132594111

KleerView [KW] sells several high quality electronic products. One of these is an electronic screen which it sells at $1,700 each with a standard one-year warranty. It also sells to its customers a separate three-year extended warranty, commencing after the end of the standard warranty. KW offers its customers who have purchased such extended warranties a service, when necessary, to perform either appropriate repairs or to replace the defective unit.

The company estimates, based upon its experience from prior years, the total warranty costs for the standard warranty to average $50 per screen, being $30 for parts and $20 for labor. It also expects the average three-year extended warranty costs to be $80 for parts and $160 for labor for each contract. It further assumes that the warranty costs for the extended warranty contracts will be incurred as follows: 20% in 20X2, 50% in 20X3 and the balance in 20X4. And finally , KW expects to recognize warranty revenues based on the proportion of costs incurred out of the total estimated costs.

During 20X1, the company sold 600 screens and 540 extended warranty contracts for cash. During the year, it also incurred some actual costs associated with the standard warranties related to the 20X1 sales of screens. The cost for parts were 150% of the labor costs. On December 31, 20X1, KW reported the following:

Current Liabilities:

Estimated Liability Under Warranty $ 15,300

Unearned Warranty Revenue $151,200

KW incurred actual costs associated with the standard warranties related to the 20X1 sales of screens, in 20X2 amounting to $17,700 and the cost for parts therein amounted to $11,800. It further incurred actual costs associated with the extended warranty contracts which were consistent with what the company had expected to incur.

Required:

Question 1: Determine the selling price for each extended warranty contract.

Question 2: Present the journal entries to be prepared, in proper format, in 20X1 in order to record all of the warranty related transactions and adjustments for 20X1.

Question 3: Present the journal entries, in proper format, in 20X2 in order to record all of the transactions related to the standard warranties of 20X1.

Question 4: Present the journal entries to be prepared, in proper format, in 20X2 in order to record all of the transactions related to the extended warranties of 20X1.

Question 5: What liabilities related to warranties, would be reported on the December 31, 20X2 Balance Sheet. Show how these would be classified.