Computers Galore Ltd. sells computers, computer accessories, and software. On its computer sales, the company provides a one-month warranty that is included in the cost of the computer. Claims under the warranties vary from replacing defective parts to providing customers with new computers if repairs cannot be made. During 2011, the estimated cost related to the one-month warranties was $40,000, of which $36,000 had been incurred before year end.
For an additional charge of $100, Computers Galore also offers extended warranty coverage for two years on its computers. This amount is expected to cover the costs associated with the extended warranties. During 2011, Computers Galore sold 800 two-year warranties. The costs incurred during the year for repairs and replacements under these warranties amounted to $31,000.
Required:
a. Prepare journal entries to record the warranty transactions for 2011.
b. Should Computers Galore classify its warranty obligations as current or non-current? Explain.
c. If the actual costs incurred by the company under the extended warranties are less than the amount charged for them, how should the company account for the difference?