Genius Computers sells computers and offers an assurance-type warranty that covers all repair costs, including parts and labor, for one year after the date of purchase. Genius also sells a service- type warranty contract that covers all parts and labor for three years after the base warranty expires. The company estimates that the service- type warranty will be used 40% in the first year, 35% in the second, and 25% in the third year of the contract. In the year in which the computers were sold, the company also sold 10,000 service- type warranties at a price of $ 200 per contract, and received cash. Genius sold the contracts at the end of the year and did not recognize any warranty revenue in the year of the sale. The firm did not make any actual repairs in the year of the sale covered by the assurance-type warranty. During the following year, the company incurred $ 45,000 in actual warranty claims that are now only covered under the service- type warranty contract. The repair costs included $ 31,000 in parts and $ 14,000 in labor (unpaid).
Required
Prepare the journal entries required to record the effects of offering the service- type warranty contract in the year of the sale and during the following year.