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 2021
Number of warranty contracts sold 1,000 1,200
Costs of warranty services performed 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:
2020 2021
(a) Cash 720,000 864,000
Unearned Revenue from Warranty Contracts 720,000 864,000

Cost of Warranty Contracts 25,000 100,000

Cash, Materials, etc. 25,000 100,000

Unearned Revenue from Warranty Contracts 72,000 266,400

Revenue from Warranty Contracts 72,000 266,400
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) 648,000
Unearned Revenue recorded during 2021 864,000
Revenue recognized during 2021 (266,400)
Unearned Revenue from Warrant Contracts, Dec. 31, 2021 1,245,600
or

From 2020 contracts 720,000 x 65% 468,000

From 2021 contracts 864,000 x 90% 777,600
Total 1,245,600

(c) 2020 2021

Revenue from warranty contracts - see (a) 72,000 266,400
 Cost of warranty contracts 25,000 100,000
Profit from warranty contracts 47,000 166,400

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 Income from warranty

Warranty Contracts, Dec contracts for year 2020
31, 2020

a. 956,250 168,750
b. 787,500 168,750
c. 787,500 73,750
d. 956,250 73,750
Answer:

D Warranty contracts (500 x 2,250) P1,125,000

Earned during 2020 (1,125,000 x ½ x 30%) 168,750
Unearned revenue from service contracts at Dec. 31, 2020 P 956,250

Revenue earned from service contracts P168,750

Cost of servicing contracts 95,000
Profit from service contracts P 73,750