Reference no: EM132420528

ABC LTD sells the Exotica 3000, a luxury automobile for $200,000. A fiveyear "bumper to bumper" (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.

ABC 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, ABC sold five of the car/warranty packages to a wealthy 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.

Round percentages to one decimal place, for example 5.5%.

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.