Question - A.J. Smith Electronics is a retail consumer electronics company that also sells extended contracts for many of the products that it carries. The extended warranty provides coverage for the years beyond expiration of the manufacturer's warranty. In 2009, A.J. Smith sold extended warranties amounting to $1,700,000. The warranty coverage for all of these begins in 2010 and runs through 2012. The total expected cost of providing warranty services on these contracts is $500,000.
a. How should A.J. Smith recognize revenue on the extended warranty contracts?
b. Estimate the revenue, expense, and gross profit reported from these contracts in the year that the revenue is recognized.
c. In 2010, as a special promotion, A.J. Smith sold a digital camera (retail price $300), the photograph printer (retail price $125), and an extended warranty contract for each price $75) as a package for a special price of $399. The extended warranty covers the years from 2011 through 2013. The company sold 200 of these camera-printer packages. Calculate the revenue that A.I. Smith should recognize in each year from 2010 through 2013.