Earthlight is a maker of earth moving equipment. The company sells an excavator to firms in the
Question:
Earthlight is a maker of earth moving equipment. The company sells an excavator to firms in the construction industry at $58,000 per unit. Each excavator comes with a two-year warranty.
Earthlight accounts for the warranty as a service-type warranty, and allocates $6,000 of the
$58,000 selling price to the warranty. The company sold 160 units of the excavator in 2013. The company estimatedthat warranty costs would average $4,500 per excavator over two years.
Actual costs incurred by Earthlight to honour warranty claims in 2013 totalled $324,000 ($170,000 for labor, $150,000 for parts and the rest cash). Warranty revenues are recognized each year based on the proportion of warranty costsincurred in the year out of the total estimated costs.
- Prepare journal entries to record the sale of the excavators in 2013, the recognition of warranty revenues, and the use of economic resources to honour warranty claims.
- Assume Earthlight instead accounted for its warranty as an assurance-type warranty. Prepare all necessary journal entries in 2013.
Auditing and Assurance Services A Systematic Approach
ISBN: 978-1259162343
9th edition
Authors: William Messier, Steven Glover, Douglas Prawitt