Problem: Sheryl Crow Equipment Company sold 500 Rollomatics during 2004 at $6,000 each. During 2004, Crow spent $20,000 servicing the 2-year warranties that accompany the Rollomatic. All applicable transactions are on a cash basis.
Instructions:
1. Prepare 2004 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.
2. Prepare 2004 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.