Waymire Company sells a motor that carries a 60-day unconditional warranty against product failure. Waymire estimates that between the sale and lapse of the product warranty, 2% of the 69,000 units sold this period will require repair at an average cost of $50 per unit. The warranty liability for this product had a beginning-of-period balance of $30,000, and $27,000 has already been spent on warranty repairs and replacements during the period.

a. How much warranty expense must Waymire report in its income statement and what amount of warranty liability must it report on its balance sheet for this year?

b. What analysis issues do we need to consider with respect to the amount of reported warranty liability?

c. What solvency ratios are increased if warranty liabilities rise?