Chapnik Equipment Corporation (CEC) produced custom- designed machinery for a long- time customer. The direct cost to produce the machinery was $ 1.4 million. CEC sold the equipment to the customer for $ 2.0 million. The machinery was delivered, installed, and tested during September 20X1. At the end of September, the customer declared satisfaction with the machinery and signed a formal declaration of acceptance. CEC guaranteed the equipment for a full two years after acceptance, agreeing to correct any defects or operational problems that might occur before 30 September 20X3. At the time of the sale, CEC management estimated that the eventual warranty cost would be no more than $ 100,000, since CEC had considerable experience with this general type of machinery. Subsequent experience was as follows:
a. Repair costs during the remainder of 20X1 amounted to $ 25,000.
b. At the end of 20X1, CEC managers decided that the total warranty cost might be as much as $ 130,000 by the end of the warranty period.
c. During 20X2, total warranty costs amounted to $ 40,000.
d. At the end of 20X2, management revised their estimate of remaining warranty cost to just $ 20,000.
e. Additional warranty costs during 20X3 (i. e., up to the end of the warranty period) were $ 15,000.

Prepare the entries concerning the sale and the warranty that the company would make from 30 September 20X1 through 30 September 20X3 under each of the following two assumptions:
1. Assume that warranty cost is in the form of an assurance.
2. Assume instead that CEC also sells the warranty as a separate service. CEC management estimates that of the $ 2 million total revenue, 6% should be allocated as revenue relating to the warranty. The warranty- related revenue will be recognized in earnings straight- line through the warranty period.

  • CreatedFebruary 17, 2015
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