All sales include a limited 1-year manufacturer’s warranty that provides assurance that the fans will function as intended. SWL also sells at the time of selling the fans an extended 2-year service warranty that covers additional repairs. Not all customers purchase the extended service contract. Customers have 30 days to pay for the fans and cash is paid at the time of entering into the extended service contract. The 2-year extended service warranty is more comprehensive than the manufacturer’s warranty and begins when the fans are purchased. The 2021 sales are as follows:

Ceiling fans                                                   $8,230,000

Extended 2-year service warranties         $1,850,000

SWL has several years of cost experience that informs their financial reporting process for warranty costs. The 1-year manufacturer’s warranty costs (parts and labour) are approximately 3% of the selling price of the ceiling fans and the 2-year extended service warranty costs (parts and labour) are approximately 30% of the service contract price. The actual 2021 warranty costs are as follows:

Manufacturer’s 1-year warranty parts $112,500

Manufacturer’s 1-year warranty labour $167,000

Extended 2-year service warranty parts $267,000

Extended 2-year service warranty labour $413,000

Your analysis of the ceiling fans scenario should specifically address the issue of the timing of the recognition of warranty costs.

How many performance obligations and journal entries for it?

Answer rating: 100% (QA)

In assessing whether a warranty provides a customer with a service in addition to the assurance that ... View the full answer