Entertainment Tonight, Inc.: Warranty Accounting Analysis
Overview
Entertainment Tonight, Inc. is a company that manufactures and sells stereo systems. They provide an assurance-type warranty for the first 90 days with the purchase of their stereo systems. In addition to this, Entertainment Tonight offers an optional extended coverage plan that allows customers to have their stereo systems repaired or replaced for 2 years beyond the initial warranty period.
The total transaction price for the sale of the stereo system and the extended warranty is $3,000. The standalone price for the stereo system is $2,100, and the extended warranty is $900. The estimated cost of the assurance-type warranty is $350.
Accounting Treatment
According to the information provided, the accounting treatment for the warranty will include a credit to Unearned Warranty Revenue of $871.
This means that when a customer purchases the stereo system along with the extended warranty plan, $871 of the total transaction price is recognized as unearned revenue for the warranty coverage. This amount will be recognized as revenue over the 2-year period covered by the extended warranty plan.
What is the total transaction price for the sale of the stereo system and the extended warranty plan? What is the standalone price of each component? What is the estimated cost 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 the stereo system is $2,100, and the extended warranty is $900. The estimated cost of the assurance-type warranty is $350.