Vision Company sells high-definition televisions (HDTVs). Each HDTV has a 24-month warranty on parts. If a repair under warranty is required, the company charges for the labor. Management has found that 20 percent of the HDTVs sold require some work before the warranty expires. Furthermore, the average cost of replacement parts has been $120 per repair. At the beginning of January, the account for the estimated liability for product warranties had a credit balance of $28,600. During January, 112 HDTVs were returned under the warranty. The cost of the parts used in repairing the HDTVs was $17,530, and $18,884 was collected as service revenue for the labor involved. During January, the month before the Super Bowl, Vision Company sold 450 HDTVs.
1. Prepare journal entries to record
(a) The warranty work completed during January, including related revenue,
(b) The estimated liability for product warranties for HDTVs sold during the month.
2. Compute the balance of the Estimated Product Warranty Liability account at the end of the month.
3. If the company’s product warranty liability is overestimated, what are the effects on current and future years’ income?