YellowCard Company manufactures accessories for Apple products. It had the following selected transactions during 2025.

1. YellowCard provides a 2-year warranty on its docking stations, which it began selling in 2025. During 2025, YellowCard spent $6,000 servicing warranty claims. At year-end, YellowCard estimates that an additional $45,000 will be spent in the future to service warranties related to 2025 sales.

2. YellowCard has a $200,000 loan outstanding from First Trust Corp. The loan is set to mature on February 28, 2026. For several years, First Trust has agreed to extend the loan, as long as YellowCard makes all its quarterly interest payments (interest is due on the last days of each February, May, August, and November) and maintains an acid-test ratio (also called “quick ratio”) of at least 1.25. First Trust has provided YellowCard a contractual right indicating that First Trust will extend the loan another 12 months, providing YellowCard has made interest payments.

3. On November 1, 2025, Yellowcard received an advance payment of $24,000 for design and manufacture of specialized iPhone holders that will mount on bicycles. The total invoice price for the order is $92,000.Yellowcard receives the remaining invoice price in cash when the adapters are delivered to the customer in March 2026 (with a total cost of $55,000). (Note: For any part of this problem requiring an interest or discount rate, use 10%.)

Accounting

Prepare all 2025 journal entries relating to (a) YellowCard’s warranties, (b) YellowCard’s loan from First Trust Corp., and (c) the delivery of the special-order iPhone stands in March 2026.

Analysis

Describe how the transactions above affect ratios that might be used to assess YellowCard’s liquidity. How important is the commitment letter that YellowCard has from First Trust Corp. to these ratios?

Principles

YellowCard is contemplating offering an extended warranty. If customers pay an additional $50 at the time of product purchase, YellowCard would extend the warranty an additional two years. Would the extended warranty meet the definition of a liability under current generally accepted accounting principles? Briefly explain.