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Appendix $2$

Fit Vents $($who follows IFRS$)$ sells vents for $$30$ each, which includes a $2-$year assurance$-$type

warranty that requires the company to replace defective parts. During Year $1,$ Fit Vents sold

$10,000$ vents for cash. Based on experience, the company has estimated the total $2-$year

warranty costs to be $$2\mathrm{.}50$ per vent. $($Assume sales all occur on December $31,$ Year $1.)$

In Year $2,$ Fit Vents incurred actual warranty costs relative to Year $1$ vent sales of $$15,000.$ The

vents are replaced from inventory.

Fit Vents also sells a five$-$year extended warranty for $$6.$ Warranty expenditures are assumed to

be zero in the first two years $($as the assurance$-$type warranty covers these repairs$)$ and then

evenly over the final three years.

Of the $10,000$ vents sold in Year $1,$ half the customers purchased the extended warranty $($service

type$).$ During Year $3,$ Fit Vents incurred $$8,000$ in warranty costs related to the Year $1$ vent

sales and the extended warranty.

Matt would like us to:

Prepare the entries for the sale of the vents, including both warranties.

Prepare the entry for Year $2$ warranty costs. Assume the end of the year as the date

Prepare the Year $3$ entry for the warranty costs $($use a date of December $31)$ and the

December $31,$ year $3,$ adjusting entry for the extended warranty.

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