Question - Nichols Inc. sells washing machines with a three-year warranty. In the past Nichols has found that in the year after the sale, warranty costs have been 3% of sales; in the second year after sale, 5% of sales; and in the third year after sale, 7% of sales. The following data are also available:
Year Sales Warranty Expenditures
2013 $500,000 $62,000
2014 650,000 82,000
2015 700,000 85,000
Required:
1. Prepare the journal entries for the preceding transactions for 2013-2015, using the expense warranty accrual method.
2. What amount should Nichols report as a liability on its December 31, 2015 balance sheet, assuming the liability had a balance of $88,200 on December 31, 2014?