In 2014, the company began marketing its leading rodent controller, rZap which uses laser technology to keep rodents under control.  Each unit sells for $1,000 and comes with a standard one-year warranty.  The cost of this warranty is estimated at 4% of total sales.  The annual sales for 2014 amounted to $11,200,000 and are assumed to have occurred uniformly throughout the year.  Thus the annual warranty costs would be spread over two years, i.e., some in the year of sale and the balance in the year following the sales.  In 2014, on an average, MyTee incurred actual costs of $13 per unit sold for parts and labour, to service the units sold in 2014.  

In addition, MyTee also offered an optional two-year extended warranty contract which follows the expiry of the standard warranty contract.  In 2014, the company issued 8,000 such extended warranty contracts on the sales of rZap at a unit price of $85 per contract.  Further, it also expects the two-year extended warranty revenues to be earned at $35 in the first year it comes into effect and  $50 in the second year.

Required:

For the sales of 2014 only

1,   Prepare,in proper format, journal entries required to record the sales and all the warranty related transactions and adjustments for 2014.  

2.   What liabilities, relative to the these transactions, would be reported on the December 31, 2014 Balance Sheet.  Show how these would be classified.

In 2015, MyTee incurred actual costs to service the standard warranty claims associated with the 2014 sales of rZap.  These costs amounted to, on an average, $27 per unit for parts and labour.

In addition in the same year, it also incurred additional actual costs of $124,000 for parts and labour to service the claims associated with the extended warranty contracts. Use this

additional information to answer the next two questions.

3.   Prepare,in proper format, journal entries for 2015 to record transactions related to both the 2014 standard and 2014 extended warranties.

4.   What amounts, relative to the 2015 warranty transactions, would be reported on the December 31, 2015 Balance Sheet.  Show how these would be classified.

Answer rating: 100% (QA)

Complete solution is given below This problem has the following points in nutshell Warranty cost per unit 4 of 1000 40 of which 13 incurred in year of ... View the full answer