When Park Avenue Pet Shop sells a puppy, it provides a health warranty for the little critter. If a puppy becomes ill in the first two years after the sale, Park Avenue Pet Shop will pay the vet bill up to $300. Because this is normally a significant expense for the shop, the accountant insists that Park Avenue Pet Shop record an estimated warranty liability at the end of every year before the financial statements are prepared. On December 31, 2010, the accountant estimated that the warranty costs for puppies sold in 2010 would be $2,000 and made the appropriate entry to record that liability. On March 30, 2011, the store received a $50 vet bill from one of its customers, who had bought a puppy in 2010. Park Avenue Pet Shop wrote a check for $50 to reimburse the puppy’s owner.
1. Enter the transaction into the accounting equation to record the estimated warranty liability at December 31, 2010.
2. Enter the transaction into the accounting equation to record the payment of the vet bill on March 30, 2011. What effect did this payment have on the 2011 financial statements of Park Avenue Pet Shop?