Exciting Sales and Warranty Revenue at Alpine Sports!
How would the sales and warranty revenue be recognized at Alpine Sports?
Alpine Sports sells an extended warranty to go along with their skis and snowboarding equipment. For the month of November their sales were $57,000 of which $5,000 was for their extended warranty. How would the sales and warranty revenue be recognized?
a. They would recognize $57,000 as sales revenue, and then set up a Warranty Liability account for the estimated costs of honouring the warranty.
b. They would recognize $57,000 as sales revenue, and then record a Warranty Expense for the estimated costs of honouring the warranty.
c. They would recognize $52,000 in sales revenue, and set up an unearned warranty revenue account for $5,000.
d. They would recognize $52,000 in sales revenue and $5,000 in warranty revenue.
Answer:
The correct answer is option b: They would recognize $57,000 as sales revenue, and then record a Warranty Expense for the estimated costs of honouring the warranty.
Explanation:
Alpine Sports recognizes $57,000 as sales revenue from the sale of skis and snowboarding equipment in November. However, since $5,000 of this revenue is specifically attributed to the extended warranty sold with the equipment, Alpine Sports sets aside a portion of the revenue as a Warranty Expense.
By recording the Warranty Expense, Alpine Sports matches the costs associated with honoring the warranty with the revenue generated from selling it. This ensures accurate financial reporting and analysis of the company's profitability and liability for warranty-related expenses.
Recognizing the warranty expense also allows Alpine Sports to fulfill their warranty obligations effectively and maintain transparency in their financial statements.
Overall, the recognition of sales and warranty revenue at Alpine Sports follows best practices in accounting, ensuring proper handling of revenue and expenses related to extended warranties.