P18-6 (LO3) (Warranty, Customer Loyalty Program) Hale Hardware takes pride as the “shop around the corner” that can compete with the big-box home improvement stores by providing good service from knowledgeable sales associates (many of whom are retired, local handymen). Hale has developed the following two revenue arrangements to enhance its relationships with customers and increase its bottom line.

1. Hale sells a specialty portable winch that is popular with many of the local customers for use at their lake homes (putting docks in and out, launching boats, etc.). The Hale winch is a standard manufactured winch that Hale modifies so the winch can be used for a variety of tasks. Hale sold 70 of these winches in 2017 at a total price of \(21,000, with a warranty guarantee that the product was free of any defects. The cost of winches sold is \)16,000. The assurance warranties extend for a 3-year period with an estimated cost of \(2,100. In addition, Hale sold extended warranties related to 20 Hale winches for 2 years beyond the 3-year period for \)400 each.

2. To bolster its already strong customer base, Hale implemented a customer loyalty program that rewards a customer with 1 loyalty point for every \(10 of purchases on a select group of Hale products. Each point is redeemable for a \)1 discount on any purchases of Hale merchandise in the following 2 years. During 2017, customers purchased select group products for \(100,000 (all products are sold to provide a 45% gross profit) and earned 10,000 points redeemable for future purchases. The standalone selling price of the purchased products is \)100,000. Based on prior experience with incentives programs Problems 1045 like this, Hale expects 9,500 points to be redeemed related to these sales (Hale appropriately uses this experience to estimate the value of future consideration related to bonus points).

Instructions

(b) Prepare the journal entries for Hale related to the sales of Hale winches with warranties.

Step by step solution

01

Definition of Gross Profit

The profit generated by the business entity after adjusting the cost incurred in producing the goods is known as gross profit. Only direct costs associated with the production are adjusted.

02

Journal Entries

Date	Accounts and Explanation	Debit $	Credit $
	Cash	$29,000
	Unearned warranty revenue		$8,000
	Sales revenue		$21,000
	Cost of goods sold	$16,000
	Inventory		$16,000
		$45,000	$45,000

Warranty expenses will be recorded in the first two years because they are only incurred in the first two years. Adjusting entry will be made for estimating warranty liability for future periods.

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