In 2020, Surinder’s Cycles Inc. sold 2,500 mountain bikes. For the first time, Surinder offered an in-store, no-charge, two-year warranty on each bike sold. Company management estimates that the average cost of providing the warranty is $5 per unit in the first year of coverage and $7 per unit in the second year.

Surinder’s warranty-related expenditures totalled $6,000 for labour costs during 2020. 

Required:

a. Prepare the summary journal entry to recognize Surinder’s warranty expense in 2020. 

b. Prepare the summary journal entry to recognize the warranty service provided in 2020. 

c. Determine the total provision for warranty obligations that will be reported on the company’s balance sheet at year-end. Assuming that all sales transactions and warranty service took place on the last day of the year, how much of the warranty obligation will be classified as a current liability? As a non-current liability?

d. Briefly explain why companies offer warranties.