On January 2, 2020, Grando Company sells production equipment to Fargo Inc. for $50,000. Grando includes a 2-year assurance warranty service with the sale of all its equipment. The customer receives and pays for the equipment on January 2, 2020. During 2020, Grando incurs costs related to warranties of $900. At December 31, 2020, Grando estimates that $650 of warranty costs will be incurred in the second year of the warranty.

Instructions

a. Prepare the journal entry to record this transaction on January 2, 2020, and on December 31, 2020 (assuming financial statements are prepared on December 31, 2020).

b. Repeat the requirements for (a), assuming that in addition to the assurance warranty, Grando sold an extended warranty (service-type warranty) for an additional 2 years (2022–2023) for $800.