Ford offers a three-year or 36,0000-milewarranty on the Explorer car. Consumersmust pay for extended warranties beyond themanufacturer's warranty period. The AutoClub offers an extended warranty for a FordExplorer in Hanover, New Hampshire, at aprice of $1,259. This would cover years 4 and5, after the expiry of manufacturer's warranty.(a)Explain the role of discounting in yourdecision whether or not to purchase theextended warranty.(b)Suppose that the expected cost of repair is$800 in each of years 4 and 5. If your discountrate is 6% per year, should you purchase theextended warranty?(c)Would your decision be different if yourdiscount rate were 1% per year?

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Answered: extended warranties

Business

Accounting

extended warranties

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Assume that Ford records a warranty expense for a new F-150 model. The trucks carry a year or mile powertrain warranty. During the first year the average warranty claim is only. Should this information result in a change in the warranty expense assumptions for next year’s model? Explain your answer.
During 2020, Beautiful Company introduced a fully automatic washing machine with dryer. The sales price per unit that comes with warranty is P40,000. The company offers a three-year warranty against defects and provides service other than the agreed-upon specifications. In addition, the customers are given the option to purchase the warranty separately. If the customer opted not to buy the warranty, the washing machine with dryer is sold for P37,500. The following are the sales data (see image below).Beautiful estimates that of the total pesos spent for repairs in the warranty contracts, 20% is incurred evenly during the first warranty year, 30% evenly in the second warranty year and 50% evenly during the third warranty year. Cost of servicing the units during 2020 and 2021 were P150,000 and P300,000 respectively.How much is the Unearned Revenue from Warranty Contracts at December 31, 2021?
In 2020, Eastern Appliance Manufacturing introduced a fully automatic washing machine with dryer. The sales price per unit, which comes with warranty, is P40,000. The company offers a three-year warranty against defects and provides service other than the agreed-upon specifications. In addition, the customers are given the option to purchase the warranty separately. If the customer opted not to buy the warranty, the washing machine with dryer is sold for P37,500. The following sales data are compiled for 2020 and 2021. • Washing machine with dryer sold: 2020- 800; 2021- 1,000 • Warranty contracts sold: 2020- 700; 2021- 850 Eastern Appliance Manufacturing estimates that of the total pesos spent for repairs in the warranty contracts, 20% is incurred evenly during the first warranty year, 30% evenly in the second warranty year, and 50% evenly during the third warranty year. Cost of servicing the units during 2020 and 2021 were P100,000 and P510,000, respectively. How much is the unearned…
Carla Vista Resellers Ltd. (CVRL) sells gently used and refurbished appliances. The company provides a three-month warranty that is included in the cost of the appliance. Claims under the warranties vary from replacing defective parts to providing customers with new appliances if repairs cannot be made. During 2024, the estimated cost related to the three-month warranties was $36,480, of which $24,000 had been incurred before year end ($18,240 on replacement appliances and $5,760 for parts). For an additional charge of $144, CVRL also offers extended warranty coverage for three years on its refurbished appliances. This amount is expected to cover the costs associated with the extended warranties. During 2024, CVRL sold 480 three-year warranty plans. The costs incurred during the year for repairs and replacements under these plans amounted to $14,400. Based on experience, the company estimates that its total warranty costs over the three-year coverage period will be $43,200, which it…
Sunnyvale Computer Company sells a line of computers that carry a six-month warranty. Customers are offered the opportunity to buy a two-year extended warranty for an additional charge. During 2024, Sunnyvale received $328,000 from customers for these extended warranties. All sales are on credit, and funds are received evenly throughout the year and the warranties go into effect immediately after purchase. Required: Prepare a summary journal entry to record sales of the extended warranties. Also prepare any other entries associated with the warranties that should be recorded during 2024. 1. Record the $328,000 sale of the extended warranties. 2.Record the recognition of revenue from extended warranties for the year ending December 31, 2024.
XYZ Computers manufactures and sells moblile tokens and radio token systems which include a 180 day warranty on product defects. It also sells an extended warranty which provides an additional two years of protection. On May 10, the company sold a token system for $3,850 and an extended warranty for another $1,200. The journal entry to record this transaction by XYZ would include Select one: O a. a debit to Prepaid Service Revenue of $1,200 O b. a credit to Sales Revenue of $5,020 O c.a credit to Unearned Service Revenue of $1200. O d. a credit to Service Revenue of $5,050
Creative Computing sells a laptop computer called the Creative Package to Professor Smith with an extended warranty for $780. The $780 price of a Creative Package includes the following: One laptop Computer A one year basic assurance warranty. This warranty guarantees that Creative will cover any costs that arise due to repairs or replacements associated with defective products for up to one year. An agreement that Professor Smith will pay an additional $75 to purchase an extended 1 year warranty. How many performance obligations are included in this sale of the Creative Package? Question 13 options: a) 1 b) 2 c) 3 d) 4
Montague Auto Repair specializes in the repair of foreign car transmissions. To encourage business, Montague offers a 6-month warranty on all repairs. The following data are available for 2019: Transmissions repaired, 2019 4,800 Expected frequency of warranty claims 0.09 per repair Actual warranty claims, 2019 $137,750 Estimated warranty liability, 1/1/19 $25,000 Estimated cost of each warranty claim $300 Assume that warranty claims are paid in cash. Required: 1. Compute the warranty expense for 2019. 2. Prepare the entry to record the payment of the 2019 warranty claims. 3. Conceptual Connection: What is the December 31, 2019, balance in the warranty liability account? Why has the balance in the warranty liability account changed from January 1, 2019?
Star Wars Computers manufactures and sells pagers and radio paging systems which include a 6-month warranty on product defects. It also sells an extended warranty which provides an additional two years of protection beyond the 6-month warranty. On July 1, 2024, it sold a paging system for $4,500 and an extended warranty for another $1,400. The customer paid for the entire transaction with cash. The journal entry to record this transaction would include:
Vroom Vacuums sells the Tornado vacuum cleaner. Each Tornado has a one-year warranty that covers any product defects. When customers purchase a Tornado, they also have the option to purchase an extended three-year warranty that covers any breakage or maintenance. The extended warranty sells for the same amount regardless of whether it is purchased at the same time as the Tornado or at some other time.How many performance obligations exist in the implied contract for the purchase of a vacuum cleaner? Identify the best description of each performance obligation from the following list. (You may select more than one answer.) Delivery of vacuum cleaner The one-year quality-assurance warranty The option to purchase the three-year extended warranty Purchase of vacuum cleaner
Vroom Vacuums sells the Tornado vacuum cleaner. Each Tornado has a one-year warranty that covers any product defects. When customers purchase a Tornado, they also have the option to purchase an extended three-year warranty that covers any breakage or maintenance. The extended warranty sells for the same amount regardless of whether it is purchased at the same time as the Tornado or at some other time. How many performance obligations exist in the implied contract for the purchase of a vacuum cleaner? Number of performance obligations in the contract Identify the best description of each performance obligation from the following list. Note: You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect. Delivery of vacuum cleaner The one-year quality-assurance…
Cullumber Resellers Ltd. (CRL) sells gently used and refurbished appliances. The company provides a three-month warranty that is included in the cost of the appliance. Claims under the warranties vary from replacing defective parts to providing customers with new appliances if repairs cannot be made. During 2024, the estimated cost related to the three-month warranties was $41,040, of which $27,000 had been incurred before year end ($20,520 on replacement appliances and $6,480 for parts). For an additional charge of $162, CRL also offers extended warranty coverage for three years on its refurbished appliances. This amount is expected to cover the costs associated with the extended warranties. During 2024, CRL sold 540 three-year warranty plans. The costs incurred during the year for repairs and replacements under these plans amounted to $16,200. Based on experience, the company estimates that its total warranty costs over the three-year coverage period will be $48,600, which it expects…