Situation: Baxter Incorporated manufactures and sells Heating and Air Conditioni

Question

Situation:
Baxter Incorporated manufactures and sells Heating and Air Conditioning Units for large industrial buildings and uses. Baxter offers their customers a one year warranty on all products sold.  Customers can also purchase a five year warranty on their heating and air conditioning unit that were purchased.  SUNY Oswego was doing renovations to their campus and had the need for two large heating and air conditioning units.  On January 2, 2007, SUNY Oswego contracted with Baxter Incorporated to purchase these units at a cost of $240,000.  SUNY Oswego was aware of the one year warranty but also decided to purchase the additional five year warranty.  Baxter Incorporated received $75,000 from SUNY Oswego for the warranties on the two heating and air conditioning units.  

Please include formal J/E that would be used as well as work provided to calculate an answer.

Baxter Incorporated manufactures and sells Heating and Air Conditioning Units for large industrial buildings and uses. Baxter offers their customers a one year warranty on all products sold. Customers can also purchase a five year warranty on their heating and air conditioning unit that were purchased. SUNY Oswego was doing renovations to their campus and had the need for two large heating and air conditioning units. On January 2, 2007, SUNY Oswego contracted with Baxter Incorporated to purchase these units at a cost of $240,000. SUNY Oswego was aware of the one year warranty but also decided to purchase the additional five year warranty. Baxter Incorporated received $75,000 from SUNY Oswego for the warranties on the two heating and air conditioning units. Determine the journal entries to record the purchase, one year warranty and five year warranty. In addition, determine journal entries for any aspect of the transaction that should be recorded for that year (assume the sale was made by credit). Please include formal J/E that would be used as well as work provided to calculate an answer.

Explanation / Answer

Many variables are involved when determining the proper journal entries to record a sale. For example, consignment sales are recorded uniquely based on the terms of the consignment agreement between parties. Whether or not the sale is for a service or a good also presents differences in the way journal entries are recorded for a sale. If the sale is for a good, whether the company uses a perpetual or periodic system to account for inventory must also be taken into consideration when recording journal entries for a sale. Another variable that must be taken into consideration when recording a sale is whether or not the sale is on credit with terms that allow the purchaser the opportunity to purchase the good or service at discount if paid in


timely fashion (trade receivable), and in addition, whether the company uses the net method or gross method when recording journal entries. Assuming the sales transaction is not made on consignment, is not a trade receivable, and no inventory is involved, the following are the journal entries to record the sale. If the sale was a cash transaction: DR cash CR a revenue account If the sale was a credit transaction: DR an accounts receivable CR a revenue account
Many variables are involved when determining the proper journal entries to record a sale. For example, consignment sales are recorded uniquely based on the terms of the consignment agreement between parties. Whether or not the sale is for a service or a good also presents differences in the way journal entries are recorded for a sale. If the sale is for a good, whether the company uses a perpetual or periodic system to account for inventory must also be taken into consideration when recording journal entries for a sale. Another variable that must be taken into consideration when recording a sale is whether or not the sale is on credit with terms that allow the purchaser the opportunity to purchase the good or service at discount if paid in


timely fashion (trade receivable), and in addition, whether the company uses the net method or gross method when recording journal entries. Assuming the sales transaction is not made on consignment, is not a trade receivable, and no inventory is involved, the following are the journal entries to record the sale. If the sale was a cash transaction: DR cash CR a revenue account If the sale was a credit transaction: DR an accounts receivable CR a revenue account

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