# Question

The company offers a 1-year warranty to its customers. Warranty expenditures are estimated to be 4% of sales. Sales occur evenly throughout the year. The following information relates to the company’s first two years of business:
Sales—Year 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$100,000
Actual warranty repairs—Year 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Sales—Year 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$150,000
Actual warranty repairs—Year 2. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,500
(1) Compute the balance in the warranty liability account at the end of Year 2.
(2) Evaluate whether that balance is too high or too low given the company’s experience.

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