AC13 Other Liabilities Additional Problems PDF

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ACPROVISIONS, CONTINGENCIES AND OTHER LIABILITIESADDITIONAL GUIDE PROBLEMS:Estimated Warranties – Sale of Warranty and Sales Made Evenly1. BUGGY COMPANY sells desktop computers. The company provides its customers an option to purchase a three-year of warranty for Php 720 for each unit of computer pu...

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AC13 PROVISIONS, CONTINGENCIES AND OTHER LIABILITIES ADDITIONAL GUIDE PROBLEMS: Estimated Warranties – Sale of Warranty and Sales Made Evenly 1. BUGGY COMPANY sells desktop computers. The company provides its customers an option to purchase a three-year of warranty for Php 720 for each unit of computer purchased. Sale of warranties and repairs are made evenly throughout each year. Based on industry trend, 20% of repairs are done in the first year from the date of sale, 30% in the second year and 50% in the third year. Information related to the service contracts for the years 2020 and 2021 are as follows: 2020

Number of warranty contracts sold Costs of warranty services performed

2021 1,000 1,200 25,000 100,000

Required: a. Prepare journal entries, including year-end adjustments, related to the foregoing for years 2020 and 2021. b. Determine the balance of Unearned Revenue from Warranty Contracts on December 31, 2021 c. Determine the profit from warranty contracts for the years 2020 and 2021. Answer: (a)

2020 Cash 720,000 Unearned Revenue from Warranty Contracts

2021 864,000 720,000

864,000 Cost of Warranty Contracts Cash, Materials, etc. 100,000 Unearned Revenue from Warranty Contracts Revenue from Warranty Contracts

25,000

100,000 25,000

72,000 72,000

266,400

266,400 20% x ½ x 720,000 = 72,000 20% x ½ x 720,000 = 72,000 30% x ½ x 720,000 = 108,000 20% x ½ x 864,000 = 86,400 Total for 2021 266,400 (b)

Unearned Revenue from Warranty Contracts, Dec. 31, 2020 (720,000 – 72,000) Unearned Revenue recorded during 2021 Revenue recognized during 2021 Unearned Revenue from Warrant Contracts, Dec. 31, 2021 or

648,000 864,000 (266,400) 1,245,600

From 2020 contracts 720,000 x 65% From 2021 contracts 864,000 x 90% Total (c)

468,000 777,600 1,245,600 2020

Revenue from warranty contracts - see (a) 266,400 Cost of warranty contracts Profit from warranty contracts

2021 72,000

25,000 47,000

100,000 166,400

2. MIHAWK Appliances sells electric scooters. The company provides its customers an option to purchase warranty contract for a two-year period for Php 2,250 for every unit of the scooter purchased priced at Php 45,000. If the customer chooses not to buy the warranty contract, the scooter sells for Php 42,750. Sale of warranty contracts and repairs are made evenly throughout the year. Based on past experience of MIHAWK, 30% of repairs are done in the first year from the date of sale and 70% in the second year. During 2020, MIHAWK sold 500 units of scooter and warranty contracts. Cost of servicing the units during 2020 amounted to Php 95,000. Based on the information above, MIHAWK Appliances should report the following: Unearned Revenue from Warranty Contracts, Dec 31, 2020 a. b. c. d.

956,250 787,500 787,500 956,250

Income from warranty contracts for year 2020

168,750 168,750 73,750 73,750

Answer:

D

Warranty contracts (500 x 2,250) Earned during 2020 (1,125,000 x ½ x 30%) Unearned revenue from service contracts at Dec. 31, 2020

P1,125,000 168,750 P 956,250

Revenue earned from service contracts Cost of servicing contracts Profit from service contracts

P168,750 95,000 P 73,750...