Chevla is a manufacturer of hot tubs. Chevla’s hot tubs are sold with a typical “assurance-type” warranty of six months. At the time of a sale, the purchaser has the option to buy the hot tub with a 3-year extended warranty. The 3 years would begin after the end of the six-month assurance- type warranty. If the purchaser chooses not to buy the 3-year extended warranty at the time of the purchase, the purchaser can still buy the 3-year extended warranty up to six months later. The following information is available regarding the manufacturer’s “Nova” model of hot tub: (a) The normal selling price of a Nova, without the 3-year extended warranty, is $14,000. The cost of goods sold is $9,900. (b) When a Nova is purchased as a package with the 3-year extended warranty, the selling price for the package is $15,000. This special offer is only available at the time of the initial purchase. (c) If the 3-year optional extended warranty were to be purchased by itself (separate from the hot tub), the price would be $1,500. (d) Chevla estimates that its hot tubs will have assurance-type warranty claims of 4% of the normal selling price.

 REQUIRED 

1. If Chevla sold a Nova, for cash, without a 3-year extended warranty, prepare all of the applicable journal entries at the date of delivery associated with the sale.

 2. Based on your journal entries in part 1 above, how much “Gross Profit” would be reported by Chevla?

 3. If Chevla sold a Nova, for cash, with the 3-year extended warranty as a package, prepare all of the applicable journal entries at the date of the delivery associated with the sale.

 4. Based on your journal entries in part 3 above, how much “Operating Income” would be reported by Chevla?

 5. Continuing from part 3 above, prepare the journal entry that would be recognized in the 7th month after the date of delivery.

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