The Eyes Have It sells custom eyewear during Year One that c

The Eyes Have It sells custom eyewear during Year One that come with an embedded warranty. If the glasses break during Year Two, they will be fixed for free. Customers may also purchase an extended warranty that covers Year Three. During Year One, the company sold 55,000 pairs of eyeglasses for $1,000,000. Customers who purchased 40,000 of those pairs also purchased the Year Three extended warranty. The extended warranty brought in additional cash of $200,000. The company expects that 6 percent of the glasses will break during Year Two, and another 8 percent will break during Year Three. Each repair will cost $20 to fix.

a. Record the embedded warranty in Year One.

b. Record the sale of the extended warranties in Year One.

c. Assume that during Year Two the company spends $70,000 to repair glasses for these customers.

Prepare the necessary journal entry.

d. Assume that during Year Three the company spends another $102,000 to repair glasses that are

covered under the extended warranty. Prepare the necessary journal entry.

Solution

1. in case of embeded warranty if company can estimate the amount of claims then he record the following entry in year of sale of goods,

warranty expense   dr            44000   (55000*4%*20)
to accrued warranty laibility        44000

2.as the fees for extended warranty is not yet earned at year 1 we will record following entry

cash a/c dr   200,000
to unearned revenue    200,000

3. in year two - embbeded warranty used

accrued warranty expense   dr   70000
to cash                                                  70000

4. here in year 3 first we recognise the amount of extended warranty

unearned revenue a/c dr     200,000
to extended warranty fees                  200,000

now journal entry for expense repair

warranty expense dr   102000
to cash