Packard Products manufactures wire-less routers for home use. The company reported total sales on account of $ 11,200,000 during the current year. The cost of the merchandise sold was $ 5,000,000. Packard offers an assurance- type warranty that covers all repair costs, including parts and labor, for one year after the date of sale. The company estimates that warranty costs will amount to 4% of total sales. In the year in which it sold the products, the company also sold 45,000 service- type warranties at a price of $ 85 per contract, and received cash. Packard sold the contracts at the end of the year and did not recognize any warranty revenue in the year of the sale. The service- type warranty covers all parts and labor for three years after the expiration of the assurance- type warranty. The company estimates that the service- type warranty will be used 70% in the first year of the contract, 18% in the second year, and 12% in the third year. During the year of the sale, customers made warranty claims of $ 286,500 against the assurance- type warranty. Of this amount, $ 197,500 was paid for parts and the $ 89,000 balance was incurred for labor ( unpaid). During the following year, the company incurred $ 185,000 in actual warranty claims that are now only covered under the service- type warranty contract. The repair costs included $ 101,000 in parts and $ 84,000 in labor ( unpaid).
Required
Part 1. Prepare the journal entries required to record the following:
a. Router sales for the current year. The company uses the perpetual inventory system.
b. Accrual for the estimated warranty costs for the current year.
c. Actual repairs for the current year.
d. Service- type warranty contract sales for the current year.
e. Recognition of contract revenue for three years subsequent to the sale of the service- type contracts.
f. Actual repairs for the first year under the service- type warranty contracts.
Part 2. How does Packard classify the liability for the assurance- type warranty and the unearned revenue under the service- type warranty contract on the balance sheet at the end of the year in the year of the sale?
Part 3: Record the journal entry necessary to record the estimated liability under the assurance- type warranty for the next year ( i. e., the year following the current year), assuming that total sales amounted to $ 15,675,000. Assume no warranty claims were made in year 2.