Reference no: EM133043703

Question - VeeDeeO [VDO] is a manufacturer of high end video games and other quality digital products. A popular product is Flytt, a powerful toy drone with remote control functions. The company has priced this product hundreds of dollars less than the price of its competitor's product Vings just to make Flytt the best seller in the toy drone market. Flytt sells 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.

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

6. What would be the gross profits on the extended warranties reported by VDO for 20X2?