Sunland Company sells televisions at an average price of 832

Sunland Company sells televisions at an average price of $832 and also offers to each customer a separate 3-year warranty contract for $93 that requires the company to perform periodic services and to replace defective parts. During 2017, the company sold 285 televisions and 215 warranty contracts for cash. It estimates the 3-year warranty costs as $20 for parts and $30 for labor, and accounts for warranties separately. Assume sales occurred on December 31, 2017, and straight-line recognition of warranty revenues occurs.

Account Titles and Explanation

Debit

Credit

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Sunland Company
Balance Sheet (Partial)
December 31, 2017

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Account Titles and Explanation

Debit

Credit

(To record the warranty revenue earned.)

(To record the warranty expense.)

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Sunland Company
Balance Sheet (Partial)
December 31, 2018

Sunland Company sells televisions at an average price of $832 and also offers to each customer a separate 3-year warranty contract for $93 that requires the company to perform periodic services and to replace defective parts. During 2017, the company sold 285 televisions and 215 warranty contracts for cash. It estimates the 3-year warranty costs as $20 for parts and $30 for labor, and accounts for warranties separately. Assume sales occurred on December 31, 2017, and straight-line recognition of warranty revenues occurs.

Solution

Note: Since the warranty is for 3 years, the unearned warranty revenue pertaining to the next 12 months is shown as a current liability while the remaining is shown as a long-term liability.