Reference no: EM133126930

Question - Earthlight is a maker of earth moving equipment. The company sells an excavator to firms in the construction industry at $58,000 per unit. Each excavator comes with a two-year warranty. Earthlight accounts for the warranty as a service-type warranty, and allocates $6,000 of the $58,000 selling price to the warranty. The company sold 160 units of the excavator in 2013. The company estimated that warranty costs would average $4,500 per excavator over two years. Actual costs incurred by Earthlight to honour warranty claims in 2013 totalled $324,000 ($170,000 for labor, $150,000 for parts and the rest cash). Warranty revenues are recognized each year based on the proportion of warranty costs incurred in the year out of the total estimated costs.

Required -

a. Prepare journal entries to record the sale of the excavators in 2013, the recognition of warranty revenues, and the use of economic resources to honour warranty claims.

b. Assume Earthlight instead accounted for its warranty as an assurance-type warranty. Prepare all necessary journal entries in 2013.