6-1 Warranty Liability Using Service Contracts Chapter 6 Illustrated Solution: Exercise 6-20.
15
6-1 Warranty Liability Using Service Contracts Chapter 6 Illustrated Solution: Exercise 6-20
-
Upload
amelia-sims -
Category
Documents
-
view
221 -
download
0
Transcript of 6-1 Warranty Liability Using Service Contracts Chapter 6 Illustrated Solution: Exercise 6-20.
6-1
Warranty LiabilityUsing
Service Contracts
Chapter 6Illustrated Solution: Exercise 6-20Illustrated Solution: Exercise 6-20
6-2
Warranties Obligate the seller to bear repair costs
for a specified time period. Create an expense and estimated
liability at the time of sale. All estimated expenses are matched
against revenues in the period when the item is sold.
No revenues or expenses are shown in future years.
Background–WarrantiesBackground–Warranties
6-3
Warranty Service Contracts Customer pays fixed rate in advance for all
repairs and/or maintenance for a specified time period. Services they are not entitled to under standard warranty.
Upon receipt, this payment creates a liability (unearned revenue) for the service provider.
Liability is reduced over the life of the service contract as revenue is earned.
Contract was priced originally so that revenues will exceed expenses (estimated) which will allow the provider to show a profit on the service contracts.
Background–Warranty Service ContractsBackground–Warranty Service Contracts
6-4
Warranty terms often cross multiple reporting periods.
Example:Two-year warranty beginning June 1.
Calendar Year 1: 7 monthsCalendar Year 2: 12 monthsCalendar Year 3: 5 months
Calendar Years and Warranty Life YearsCalendar Years and Warranty Life Years
6-5
Sales–Even Flow AssumptionSales–Even Flow Assumption
2001 Contracts: $60 300 = $18,000
First year 40% = 20% in 2001 + 20% in 2002
6-6
Sales–Even Flow AssumptionSales–Even Flow Assumption
2001 Contracts: $60 300 = $18,000
First year 40% = 20% in 2001 + 20% in 2002
Jan 1 (12 months) and Dec 31 (0 months)
= 6 month average
6-7
Sales–Even Flow AssumptionSales–Even Flow Assumption
2001 Contracts: $60 300 = $18,000
First year 40% = 20% in 2001 + 20% in 2002
Jan 1 (12 months) and Dec 31 (0 months)
= 6 month average
Feb 1 (11 months) and Dec 1(1 month)
= 6 month average
6-8
Sales–Even Flow AssumptionSales–Even Flow Assumption
2001 Contracts: $60 300 = $18,000
First year 40% = 20% in 2001 + 20% in 2002
Jan 1 (12 months) and Dec 31 (0 months)
= 6 month average
Feb 1 (11 months) and Dec 1(1 month)
= 6 month average
Second year 36% = 18% in 2002 and 18% in 2003
Third year 24% = 12% in 2003 and 12% in 2004
6-9
Revenue Computations by YearRevenue Computations by Year
Calendar Year
2001 Contracts
$60 x 300 = $18,000
2001
$3,600
40%2002 3,600
3,240
36%2003 3,240
2,160
24%2004 2,160
2005
Totals $18,000
}}}
6-10
Revenue Computations by YearRevenue Computations by Year
Calendar Year
2001 Contracts 2002 Contracts
$60 x 300 = $18,000 $60 x 350 = $21,000
2001
$3,600
40%2002 3,600
3,240
36%
$4,200
40%2003 3,240 4,200
2,160
24%
3,780
36%2004 2,160 3,780
2,520
24%2005 2,520
Totals $18,000 $21,000
}}}
}}}
6-11
Revenue Computations by YearRevenue Computations by Year
Calendar Year
2001 Contracts 2002 Contracts Calendar Year Totals$60 x 300 = $18,000 $60 x 350 = $21,000
2001
$3,600$3,600
40%2002 3,600
$11,0403,240
36%
$4,200
40%2003 3,240 4,200
$13,3802,160
24%
3,780
36%2004 2,160 3,780
$8,4602,520
24%2005 2,520
$2,520
Totals $18,000 $21,000 $39,000
}}}
}}}
6-12
2001 Journal Entries2001 Journal Entries
Cash ………………………………………………………. 18,000Unearned Revenue From Service Contracts……. 18,000
To record cash received from sale of service contracts: 300 $60 = $18,000.
Unearned Revenue From Service Contracts ………. 3,600
Revenue From Service Contracts…………………. 3,600To record estimated revenue earned from service contracts:(1/2 .40) $18,000 = $3,600.
Cost of Servicing Television Contracts……………… 3,350
Cash, Inventory, etc.………………………………… 3,350To record repairs actually made during the year.
6-13
2002 Journal Entries2002 Journal Entries
Cash ………………………………………………………. 21,000Unearned Revenue From Service Contracts……. 21,000
To record cash received from sale of service contracts: 350 $60 = $21,000.
Unearned Revenue From Service Contracts ………. 11,040
Revenue From Service Contracts…………………. 11,040To record estimated revenue earned from service contracts.
6-14
2002 Profit on Service Contracts2002 Profit on Service Contracts
Total revenue from service contracts in 2002…………………… $ 11,040Total actual expenses relating to service contracts …………… 9,630Profit from service contracts in 2002……………………………… $ 1,410
6-15
End of ProblemEnd of Problem
