Chapter 7, Problem 7E

Effect of warranty obligations and payments on financial statements

The Chair Company provides a 120-day parts-and-labor warranty on all merchandise it sells. The Chair Company estimates the warranty expense for the current period to be $2,650. During the period a customer returned a product that cost $1,830 to repair.

Required

a. Show the effects of these transactions on the financial statements using a horizontal statements model like the example shown here. Use a + to indicate increase, a − for decrease, and NA for not affected. In the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA).

b. Discuss the advantage of estimating the amount of warranty expense.