Effect of warranty obligations and payments on financial statements
The Cycle Company provides a 120 day parts and labor warranty on all merchandise it sells. Cycle estimates the warranty expense for the current period to be $1,400. During the period a customer returned a product that cost $596 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).
|
Assets |
= |
Liab. |
+ |
Equity |
Rev. |
Exp. |
= |
Net Inc. |
Cash Flow |
b. Discuss the advantage of estimating the amount of warranty expense.