Alvarado Company sells a machine for \($7\),400 under a 12-month warranty agreement that requires the company to replace all defective parts and to provide the repair labor at no cost to the customers. With sales being made evenly throughout the year, the company sells 600 machines in 2014 (warranty costs are incurred half in 2014 and half in 2015). As a result of product testing, the company estimates that the warranty cost is \($390\) per machine (\($170\) parts and \($220\) labor).

Instructions

(a) Assuming that actual warranty costs are incurred exactly as estimated, what journal entries would be made in 2014 and 2015?

(b) What amount, if any, is disclosed in the statement of financial position as a liability for warranty costs as of December 31, 2014?