Chapter 13 - Test Bank 195 - contracts are deferred as a...

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131. Concept 1 Office Products sells office electronics that carry a 60-day manufacturer's warranty. At the time of purchase, customers are offered the opportunity to also buy a 1-year or 2-year extended warranty for an additional charge. Required: 1. Does the sale of the extended warranty represent a loss contingency? 2. Provide journal entries for the extended warranty sales and revenue recognition. 1. This is not a loss contingency. An extended warranty is priced and sold separately from the warranted product and therefore, essentially constitutes a separate sales transaction. Since the earning process for an extended warranty continues during the contract period, revenue should be recognized over the same period. Revenue from separately priced extended warranty
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Unformatted text preview: contracts are deferred as a liability at the time of sale, and recognized over the contract period on a straight-line basis. 2. Sale of extended warranty: Adjusting journal entry in each period of the warranty to recognize revenue: AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 13-04 Determine when a liability can be classified as a noncurrent obligation. Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued. Topic: Identify contingencies Topic: Liabilities from advance collections...
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