The Wolf Appliance Co. provides a 120 day parts and labor warranty on all merchandise it sells. Wolf estimates the warranty expense for the current period to be $2,450. During the period a customer returned a product that cost $1,950 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, Use 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).
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b. Prepare the journal entry to record the warranty expense for the period.
c. Prepare the journal entry to record payment for the actual repair costs.
d. Discuss the advantage of estimating the amount of warranty expense.