Shefford Cutlery extends a lifetime replacement warranty on all units sold. Using past experience, the company estimates that 0.5% of units sold will be returned and require replacement at an average cost of $130 per unit. On January 1, 2014, the balance in Shefford’s Estimated Warranty Liability account was $15,600. During 2014, sales totalled $3,600,000 or 15,000 units. The actual number of units returned and replaced was 76.
a. Prepare the entry to estimate warranty liabilities based on the units sold for 2014. Assume the adjustment is made on December 31.
b. Record the replacement of the units returned in 2014 (use a date of December 31).
c. Calculate the balance in the Estimated Warranty Liability account at December 31, 2014.
d. What is the warranty expense that will appear on the income statement for the year ended
December 31, 2014?