Explaining Revenue Recognition and Bundled Sales

A$.$J$.$ Smith Electronics is a retail consumer electronics company that also sells extended warranty contracts for many of the products that it carries. The extended warranty provides coverage for three years beyond expiration of the manufacturer's warranty. In Year $1,$ A$.$J$.$ Smith sold extended warranties amounting to $$2,400,000.$ The warranty coverage for all of these begins in Year $2$ and runs through Year $4.$ The total expected cost of providing warranty services on these contracts is $$960,000$ and is expected to be incurred evenly over the three$-$year warranty period.