Sheryl Crow Equipment Company sold 500 Rollomatics during 2007 at $6,000 each.

During 2007, Crow spent $20,000 servicing the 2-year warranties that accompany the Rollomatic. All applicable transactions are on a cash basis.

1. Sales of 500 Rollomatics @ $6,000 each during 2007
   Cash or Accounts Receivable:                                    $3,000,000
   Sales:                                                                                                $3,000,000

2. Recognition of warranty expense, 2007
   Warranty Expense:                                         $20,000
   Cash, Inventory, Accrued Payroll                                       $20,000
   (To accrue estimated warranty costs)

3. Recognition of warranty costs incurred in 2007
   Estimated Liability under Warranties:          $120,00
   Cash, Inventory, or Accrued Payroll                                             $120,000
   (Warranty costs incurred)

Instructions

(a)Prepare 2007 entries for Crow using the expense warranty approach. Assume that Crow estimates the total cost of servicing the warranties will be $120,000 for 2 years.

DR Warranty Expense:

CR Accrued Warranty Liability

(b) Prepare 2007 entries for Crow assuming that the warranties are not an integral part of the sale. Assume that of the sales total, $150,000 relates to sales of warranty contracts. Crow estimates the total cost of servicing the warranties will be $120,000 for 2 years. Estimate revenues earned on the basis of costs incurred and estimated costs.