[hanibaki]

Hey this question I have answered but I am not sure whether I am 100% correct. So please help.

A local dealership sells cars with a 2-year embedded warranty. In addition, the company offers separately a warranty for years 3 & 4. During 2009 the dealership sold 4,000 cars at an average price of $20,000. 40% of the car buyers each purchased the extended warranty for years 3 & 4 for $2,000. The cars are sold evenly throughout the year and therefore, to simplify your calculations you can assume that all sales took place in the middle of the year. The dealership expects the costs to serve the warranties to be as follows:
Year 1 & 2 (embedded warranty): $400 per year
Year 3 (extended warranty): $600
Year 4 (extended warranty): $900
Over the years 2009 -2011 the dealership incurred the following warranty costs:
2009: 700,000
2010: 1,600,000
2011: Related to the embedded warranty – 980,000, related to the extended warranty – 800,000

Required:
For the years 2009-2011 provide all relevant journal entries. Show your calculations and provide short explanation for each entry.

[hanibaki]

these are my solns:
Year 2009
Cash/Accounts Receivable 83,200,000 (4,000 cars*20,000$)
Sales 80,000,000
Unearned Revenue 3,200,000
Explanation: The cash received consists of the cars + embedded warranty + extended warranty. The extended warranty is deferred until the years they actually are valued (matching). Therefore the warranty revenues and expenses will be recognized after year 3.
Warranty Expense 3,200,000 [(4,000 cars*$400/2) + (4,000 cars*$400) + (4,000 cars*$400/2)
Estimated Liability under Warranty 3,200,000
Explanation: We expense in 2009 the total expected warranty expense from Years 1-2. The extended warranty revenue and expenses are deferred to year 3 and 4
Estimated Liability under Warranty 700,000
Cash/Inventory/Accrued Payroll 700,000
Explanation: Accounting for the actual warranty costs

Year 2010
Estimated Liability under Warranty 1,600,000
Cash/Inventory/Accrued Payroll 1,600,000
Explanation: Accounting for the actual warranty costs
Year 2011
Estimated Liability under Warranty 800,000
Cash/Inventory/Accrued Payroll 800,000
Estimated Liability under Warranty 100,000
Warranty Expense 100,000
Explanation: Accounting for the actual warranty costs < estimated. (100,000= 3,200,000- (700,000+1,600,000+800,000) )
Unearned Revenue 1,306,667 (40%*4,000 cars*$2,000)*$980,000/[(40%*4,000 cars*$600) + (40%*4,000 cars*$900) ]
Warranty Revenue 1,306,667
Explanation: If costs of performing services under extended warranty contract are expected o be incurred in other than straight pattern, revenue is recognized over the contract period in the same pattern as the costs are expected to be incurred. In this case they expect the costs to be 600 in one year and 900 in the next, which indicates that it will not follow a straight-line pattern. To determine the warranty revenue we calculated the proportion of the warranty costs that occurred and weighted it to the total estimated extended warranty cost (matching principle, this gave us a percentage). Then we multiplied that percentage by the total warranty revenue to yield 2011 warranty revenue.
Warranty Expense 980,000
Cash/Inventory/Accrued Payroll 980,000
Explanation: The warranty expense is accounted for as incurred

[hanibaki]

these are my solns:
Year 2009
Cash/Accounts Receivable 83,200,000 (4,000 cars*20,000$)
Sales 80,000,000
Unearned Revenue 3,200,000
Explanation: The cash received consists of the cars + embedded warranty + extended warranty. The extended warranty is deferred until the years they actually are valued (matching). Therefore the warranty revenues and expenses will be recognized after year 3.
Warranty Expense 3,200,000 [(4,000 cars*$400/2) + (4,000 cars*$400) + (4,000 cars*$400/2)
Estimated Liability under Warranty 3,200,000
Explanation: We expense in 2009 the total expected warranty expense from Years 1-2. The extended warranty revenue and expenses are deferred to year 3 and 4
Estimated Liability under Warranty 700,000
Cash/Inventory/Accrued Payroll 700,000
Explanation: Accounting for the actual warranty costs

Year 2010
Estimated Liability under Warranty 1,600,000
Cash/Inventory/Accrued Payroll 1,600,000
Explanation: Accounting for the actual warranty costs
Year 2011
Estimated Liability under Warranty 800,000
Cash/Inventory/Accrued Payroll 800,000
Estimated Liability under Warranty 100,000
Warranty Expense 100,000
Explanation: Accounting for the actual warranty costs < estimated. (100,000= 3,200,000- (700,000+1,600,000+800,000) )
Unearned Revenue 1,306,667 (40%*4,000 cars*$2,000)*$980,000/[(40%*4,000 cars*$600) + (40%*4,000 cars*$900) ]
Warranty Revenue 1,306,667
Explanation: If costs of performing services under extended warranty contract are expected o be incurred in other than straight pattern, revenue is recognized over the contract period in the same pattern as the costs are expected to be incurred. In this case they expect the costs to be 600 in one year and 900 in the next, which indicates that it will not follow a straight-line pattern. To determine the warranty revenue we calculated the proportion of the warranty costs that occurred and weighted it to the total estimated extended warranty cost (matching principle, this gave us a percentage). Then we multiplied that percentage by the total warranty revenue to yield 2011 warranty revenue.
Warranty Expense 980,000
Cash/Inventory/Accrued Payroll 980,000
Explanation: The warranty expense is accounted for as incurred