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Celic Inc. manufactures and sells computers that include an assurance-type warranty for the first 90 days. Celic offers an optional extended coverage plan under which it will repair or replace any defective part for 3 years from the expiration of the assurance-type warranty. Because the optional extended coverage plan is sold separately, Celic determines that the 3 years of extended coverage represents a separate performance obligation. The total transaction price for the sale of a computer and the extended warranty is \(3,600 on October 1, 2017, and Celic determines the standalone selling price of each is \)3,200 and \(400, respectively. Further, Celic estimates, based on historical experience, it will incur \)200 in costs to repair defects that arise within the 90-day coverage period for the assurance-type warranty. The cost of the equipment is \(1,440. Assume that the \)200 in costs to repair defects in the computers occurred on October 25, 2017.

Instructions

(a) Prepare the journal entry(ies) to record the October transactions related to sale of the computers.

(b) Briefly describe the accounting for the service-type warranty after the 90-day assurance-type warranty period.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Warranty Expense

In accounting, warranty expense refers to the cost to be incurred or already being incurred by a business entity torepair or replace goods already sold to customers. Such expenses are incurred within the warranty period as stated by a business.

02

Preparation of journal entries

Date	Accounts and Explanation	Debit ($)	Credit ($)
2017
Oct 1	Accounts receivable	3,600
	Warranty expense	200
	Warranty liability		200
	Unearned warranty revenue		400
	Sales revenue		3,200
	(To record sales)
Oct 1	Cost of goods sold	1,440
	Merchandise inventory		1,440
	(To record the cost of sales)

03

Description of accounting for service-type warranty after the 90-day assurance-type warranty period

• When a customer receives the computer and actual warranty costs are spent during the initial period, i.e., first 90 days, the company reduces the warranty-type liabilityassociated with the assurance type warranty.
• Additionally, the company recognizes the unearned revenues associated with the service-type warranty and the cost associated with providing such aservice-type warranty.

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