PROBLEM:

Computer Wholesalers restores and resells notebook computers. 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 4% of sales. Sales for the month of December are $490,000. Actual warranty expenditures in January of the following year were $17,500.

MUST FIND: 1. Does this situation represent a contingent liability? 2. & 3. Record the necessary entries in the Journal Entry. 4. What is the balance in the Warranty Liability account after the entries in Parts 2 and 3?

I am having difficulty understanding how to solve this problem. Your help would be appreciated.