Palmer Music manufactures and sells MP3 players and sound systems that include a 180-day warranty on product defects. The company also sells 2-year extended warranties. On May 10, Palmer sold a sound system for $3,850 and an extended warranty for another $1,200. What should be included in the journal entry used to record this transaction?

Explanation:

Palmer Music manufactures and sells MP3 players and sound systems that include a 180-day warranty on product defects. The company also sells 2-year extended warranties. On May 10, Palmer sold a sound system for $3,850 and an extended warranty for another $1,200.

What would be included in the journal entry to record this transaction is

Dr. Cash (3850+1200)5,050

Cr. Sales3,850

Cr. Prepaid Income (Warranty)1,200

The warranty amount will not be included in the sale amount because it has not been earned, it will only be earned after the expiration of the warranty period.

Dr Cash 5,050

    Cr Sales revenue 3,850

    Cr Deferred warranty revenue 1,200

Explanation:

The deferred warranty revenue account is a liability account used to record unearned revenue which will be earned over the life of the warranty. Since the extended warranty covers a two year period, deferred revenue will decrease by $50 per month and warranty revenue will be accrued.

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