Reference no: EM133037530

Question - VDO company sells Flytt toy drones at $1,020 per unit and comes with a standard one-year warranty [SW]. VDO decided to also offer an additional three-year extended warranty [EW] to those customers who wished for some extra protection. EW commences after the end of the SW but comes at an extra charge. Under the extended warranty, VDO offers its customers a service, when necessary and at its option, to either perform appropriate repairs or to replace the defective unit.

VDO has prepared some fairly accurate cost estimates based upon its experience in prior years. The total estimated average warranty costs for each unit are as follows:

SW: $30 per unit, being $18 for parts and $12 for labor; and

EW: $48 for parts and $96 for labor.

The extended warranty costs are further assumed to be incurred as follows: 20% in 20X2, 50% in 20X3 and the balance in 20X4. VDO has decided to recognize warranty revenues equally over the three years of the EW contract.

During 20X1, the company sold 12,000 drones and 10,800 extended warranty contracts for cash. During the year, it 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, VDO reported the following:

Current Liabilities:

Estimated Liability Under Warranty $183,600

Unearned Warranty Revenue $1,814,400

VDO incurred actual costs associated with the standard warranties related to the 20X1 sales of units, in 20X2 amounting to $198,000 and the cost for parts therein amounted to $148,500. It further incurred actual costs associated with the extended warranty contracts which were consistent with what the company had expected to incur.

How would the extended warranty liabilities be reported on the December 31, 20X2 Balance Sheet? Show how these would be classified?