Assignment

1. Streep Factory provides a 2-year warranty with one of its products which was first sold in 2022.
Streep sold $1,000,000 of products subject to the warranty. Streep expects $125,000 of
warranty costs over the next 2 years. In that year, Streep spent $70,000 servicing warranty
claims.

Required:
Prepare Streep’s journal entry to record the sales (ignore cost of goods sold) and the
December 31 adjusting entry, assuming the expenditures are inventory costs!

2. Leppard AG sells DVD players. The company also offers its customers a 4-year warranty
contract. Early in 2022, Leppard sold 20,000 warranty contracts at €99 each. The company
spent €180,000 servicing warranties during 2022.

Required:
Prepare Leppard’s journal entries for (a) the sale of contracts, (b) the cost of servicing the
warranties, and (c) the recognition of warranty revenue. Assume the service costs are
inventory costs!

3. Roley SA uses a periodic inventory system and the gross method of accounting for purchase
discounts. On July 1, Roley purchased €60,000 of inventory, terms 2/10, n/30, FOB shipping
point. Roley paid freight costs of €1,200. On July 3, Roley returned damaged goods and
received credit of €6,000. On July 10, Roley paid for the goods.

Required:
Prepare all necessary journal entries for Roley!