The Malon Appliance Co. provides a 120-day parts-and-labor warranty on all merchandise it sells. Malon estimates the warranty expense for the current period to be $2,450. During this period, a customer returned a product that cost $1,950 to repair.

Required
a. Show the effects of these transactions on the financial statements using a horizontal statements model like the example shown next. Use + for increase, − for decrease, and NA for not affected. In the Statement of Cash Flows column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA).

b. Discuss the advantage of estimating the amount of warranty expense.

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Statement of Cash Balance Sheet Income Statement Stk. Equlty Assets Llab. Exp. = Net Inc. Rev. Flows