The Chair Company provides a 120-day parts-and-labor warranty on all merchandise it sells. The Chair Company estimates the warranty expense for the current period to be $2,650. During the period a customer returned a product that cost $1,830 to repair.
a. Show the effects of these transactions on the financial statements using a horizontal statements model like the example shown here. Use + for increase, – for decrease, and NA for not affected. In the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA).
b. Prepare the journal entry to record the warranty expense for the period.
c. Prepare the journal entry to record payment for the actual repair costs.
d. Why do companies estimate warranty expense and record the expense before the repairs are actually made?