Problem
In the most recent year of operations, Jill's Games sold merchandise costing $80,000 for $200,000. All merchandise was sold under a one-year warranty. At the time of sale, Jill estimated that warranty claims would amount to 4% of sales. During the year, she replaced defective merchandise for $3,000. All transactions were cash transactions.
i. Prepare journal entries to record all transactions related to the warranty.
ii. Based solely on the above information, determine Jill's Games operating income for the year.