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You purchase an automobile from Luther Auto for $25,000 on January 1, 2020. As part...

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Accounting

You purchase an automobile from Luther Auto for $25,000 on January 1, 2020. As part of the purchase price, Luther will pay for repairs for the first three years or 36,000 miles, whichever comes first. Luther estimates the assurance-type warranty costs on the automobile to be $1,000. You also purchase a service-type warranty for an additional three years or 36,000 miles for $3,000. Luther incurs warranty costs related to the assurance-type warranty of $200 in 2020, $300 in 2021, and $500 in 2022. Luther records revenue on the service-type warranty on a straight-line basis.

Instructions:

1. Prepare the journal entry to record the sale of the automobile and related warranties (January 1, 2020).

2. Prepare the journal entry to record warranty costs incurred in 2020 (January 1 - December 31, 2020).

3. Prepare the adjusting entry at December 31, 2020 to record estimated warranty expense and warranty liability for expected warranty claims in 2021.

4. Prepare the journal entry to record warranty costs incurred in 2021.

5. Prepare the entry to record revenue recognized in 2023 on the service-type warranty (January 1 -December 31,2023).

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