143.  Sunnyvale Computer Company sells a line of computers that carry a six-month warranty.

Customers are offered the opportunity to buy a two-year extended warranty for an additional
charge. During 2013, Sunnyvale received $320,000 from customers for these extended

warranties. All sales are on credit, and funds are received evenly throughout the year and the

warranties go into effect immediately after purchase.

Required:

Prepare a summary journal entry to record sales of the extended warranties. Also prepare any

other entries associated with the warranties that should be recorded during 2013.

If extended warrantees don't earn any revenue for 180 days (because normal 6-month

warranty is in effect), then only sales up until 6/30 can earn any extended-warranty revenue,

with sales on 1/1 earning 6 months worth of revenue, and sales on 6/30 earning 1 day of
revenue. If sales proceed smoothly during the year, we can assume that, as of 6/30, they have

made $320,000(.5) = $160,000 of sales. So, during that 6 month period, the $160,000 is

outstanding an average of 3 months, and so should earn 3/24 x $160,000 of revenue, or

$20,000. 

 
AACSB: Analytic
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies; including unasserted claims and
assessments.
Topic: Accounting for contingencies