Terence Trent Company

Terence Trent Company sell scanners for $800 each and offers to each customer a three-years warranty contract for $90 that requires the company to perform periodic services and to replace defective parts. During 2008, the company sold 500 scanners and 400 warranty contracts for cash. It estimates the three-year warranty costs as $30 for parts and $500 for labor and accounts for warranty on the sales warranty accrual method. Assume all sales occurred on December 3111, 2008, and revenue from the sale of the warranty is to be recognized on a straight-line basis over the life of the contract.

INSTRUCTIONS

a) Record any necessary journal entries in 2008.

b) What liability relative to these transactions would appear on the December 31, 2008 balance sheet and how would it be classified?

In 2009, Terence Trent Company incurred actual costs relative to 2008 scanner warranty sales of $3,800 for parts and $6,000 for labor.

c) Record any necessary journal entries in 2009 relative to 2008 scanner warranty.

d) What amounts relative to the 2008 scanner warranties would appear on the December 31, 2009 balance sheet and how would they be classified?