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On January 2, 2020, Grouper Company sells production equipment to Fargo Inc. for $54,000. Grouper includes a 2-year assurance warranty service with the sale of all its equipment. The customer receives and pays for the equipment on January 2, 2020. During 2020, Grouper incurs costs related to warranties of $860. At December 31, 2020, Grouper estimates that $650 of warranty costs will be incurred in the second year of the warranty.
Required:
a. Prepare the journal entry to record this transaction on January 2, 2020, and on December 31, 2020 (assuming financial statements are prepared on December 31, 2017).b. Repeat the requirements for (a), assuming that in addition to the assurance warranty, Grando sold an extended warranty (service-type warranty) for an additional 2 years (2022â2023) for $800.

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Answer:

Part a

January 2, 2020

Cash $54,000 (debit)

Revenue $54,000 (credit)

Warranty Provision $860 (debit)

Cash $860 (credit)

December 31, 2020

Warranty  $650

Warranty Provision $650

Part b

January 2, 2020

Cash $54,000 (debit)

Revenue $54,000 (credit)

Cash $800 (debit)

Deferred Warranty Service  $800 (credit)

December 31, 2020

No Entry

Explanation:

Part a

Recognise Revenue and Warranty Provision in terms of IAS 37 - Provisions. An assurance warranty is not a separate performance obligation hence accounted for in terms of IAS 37 - Provisions.

Part b

Recognise Revenue and Deferred Warranty Service in terms of IFRS 15 - Revenue from Contracts with Customer. A Service type Warranty is distinct and therefore is a separate performance obligation hence accounted for in terms of IFRS 15.

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