Prepare Woody's journal entry for the sale of contracts.
a. Debit: Cash $2,160,000; Credit: Unearned Warranty Revenue $2,160,000
b. Debit: Cash $2,160,000; Credit: Warranty Liability $2,160,000
c. Debit: Warranty Liability $2,160,000; Credit: Cash $2,160,000
d. Debit: Unearned Warranty Revenue $2,160,000; Credit: Cash $2,160,000

Prepare Woody's journal entry for the cost of servicing the warranties.
a. Debit: Warranty Expense $1,050,000; Credit: Cash $1,050,000
b. Debit: Warranty Liability $1,050,000; Credit: Cash $1,050,000
c. Debit: Cash $1,050,000; Credit: Warranty Expense $1,050,000
d. Debit: Cash $1,050,000; Credit: Warranty Liability $1,050,000

Prepare Woody's journal entry for the recognition of warranty revenue. Assume the service costs are inventory costs.
a. Debit: Warranty Liability $1,050,000; Credit: Warranty Revenue $1,050,000
b. Debit: Warranty Revenue $1,050,000; Credit: Warranty Liability $1,050,000
c. Debit: Unearned Warranty Revenue $1,050,000; Credit: Warranty Revenue $1,050,000
d. Debit: Warranty Revenue $1,050,000; Credit: Unearned Warranty Revenue $1,050,000

What is the net profit (i.e., warranty revenue less warranty expense) that the company will recognize in Year 7 related to these contracts?
a. $1,085,000
b. $175,000
c. $875,000
d. $175,000