Computer Wholesalers restores and resells notebook computers on eBay.

It originally acquires the notebook computers from corporations upgrading their computer systems, and it backs each notebook it sells with a 90-day warranty against defects. Based on previous experience, Computer Wholesalers expects warranty costs to be approximately 5% of sales. By the end of the first year, sales and actual warranty expenditures are $500,000 and $18,000, respectively.

Required:

1. Does this situation represent a contingent liability? Why or why not?

2. Record warranty expense and warranty liability for the year based on 5% of sales.

3. Record the reduction in the warranty liability and the reduction in cash of $18,000 incurred during the year.

4. What is the balance in the Warranty Liability account after the entries in Requirements 2 and 3?