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Entertainment Tonight, Inc. manufactures and sells stereo systems that include an assurance-type warranty for the first 90 days. Entertainment Tonight also offers an optional extended coverage plan under which it will repair or replace any defective part for 2 years beyond the expiration of the assurance-type warranty. The total transaction price for the sale of the stereo system and the extended warranty is $3,000. The standalone price of each is $2,300 and $900, respectively. The estimated cost of the assurance-warranty is $350. The accounting for warranty wil include a ____________
1. debit to Warranty Expense, $900.
2. debit to Warranty Liability, $350
3. credit to Warranty Liability, $900
4. credit to Unearned Warranty Revenue, $900

Answer :

The estimated cost of the assurance-warranty is $350. The accounting for warranty will include a credit to Unearned Warranty Revenue, $900

Explanation:

  • Entertainment Tonight, Inc. manufactures and sells stereo systems that include an assurance-type warranty for the first 90 days. Entertainment Tonight also offers an optional extended coverage plan under which it will repair or replace any defective part for 2 years beyond the expiration of the assurance-type warranty. The total transaction price for the sale of the stereo system and the extended warranty is $3,000. The standalone price of each is $2,300 and $900, respectively. The estimated cost of the assurance-warranty is $350. The accounting for warranty will include a credit to Unearned Warranty Revenue, $900.
  • Unearned extended warranty revenue is given to be as an unearned revenues in accrued liabilities in the balance sheets.
  • Revenue which comes from separately priced, self-insured service contracts is reffered at the point of sale.
  • Unearned revenue is a money which is received from a customer for work that has not been performed still.

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