Great Deals Boats guarantees its boats for three years or 1,500 hours, whichever comes first. Past experience of other boat makers indicates that Great Deals can expect warranty costs will equal 4% of sales. Assume in its first year, Great Deals Boats had sales totaling $593,000, receiving cash for 40% of sales and notes receivable for the remainder. Warranty payments totaled $19,000 during the year.

1. Record the sales, warranty expense, and warranty payments for Great Deals Boats. Ignore cost of goods sold.

2. Post relevant portions of the journal entries to the Estimated Warranty Payable T-account. At the end of the first year, how much in estimated warranty payable does Great Deals owe its customers?

3. What amount of warranty expense will Great Deals report during its first year of operations? Does the warranty expense for the year equal the year’s cash payments for warranties? Which accounting principle addresses this situation?