Vacuum cleaners sold by Orackle carry a one-year warranty on parts and labor. However, the company expects very few warranty claims. Last year, the company sold 500 vacuum cleaners and made warranty repairs on ten vacuums at a total cost of approximately $300.
Required:
(a) If Orackle does not record a product warranty liability at the end of each fiscal year, how will the business’s financial statements be affected? What accounting concepts or principles will be violated?
(b) Under what condition or conditions could Orackle reasonably argue that no product warranty liability needs to be recorded at year-end?
(c) Would the argument you made in part (b) be appropriate for General Motors? Why or why not?