Reference no: EM132679613

Question - Skreenz-N-Things [SNT] manufactures and sells high quality digital products. One of the popular products is a commercial cloud based digital storage unit called Storit which it sells for $5,100 per unit and which comes with a standard one-year warranty. The company also offers its customers a separate three-year extended warranty, commencing after the end of the standard warranty, at an additional charge. Under this extended warranty, SNT offers its customers a service, when necessary, to perform either appropriate repairs or to replace the defective unit.

Based upon its prior experience years, the company estimates, the total warranty costs for the standard warranty to average $150 per unit, being $90 for parts and $60 for labor. It also expects the average three-year extended warranty costs to be $240 for parts and $480 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 , SNT will recognize warranty revenues based on the proportion of costs incurred out of the total estimated costs.

During 20X1, the company sold 6,000 units and 5,400 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 units. The cost for parts were 150% of the labor costs. On December 31, 20X1, SNT reported the following:

Current Liabilities:

Estimated Liability Under Warranty $459,000

Unearned Warranty Revenue $4,536,000

SNT incurred actual costs associated with the standard warranties related to the 20X1 sales of units, in 20X2 amounting to $531,000 and the cost for parts therein amounted to $354,000. It further incurred actual costs associated with the extended warranty contracts which were consistent with what the company had expected to incur.

Required -

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

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

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

4. Present all 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.

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