Prescott Appliances is a relatively new producer of commercial grade appliances. To enhance the competitiveness of its products, on July 2, 2017, the company introduced a warranty against defects for 12 months from the date of installation.

The company’s products are of a sufficiently high quality such that no warranty claims were received in 2017. However, in February 2019, when the auditors examined the records for the year ended December 31, 2018, they noted a small number of warranty claims in 2018 amounting to $163,000, which was recorded as miscellaneous expense. These claims alerted the auditors to the fact that the company should have but did not accrue for the expected warranty costs starting in 2017.

Prescott’s management estimates warranty fulfillment costs to be 0.5% of revenue. The company recorded revenue of $41,528,000 in 2017 and $46,321,000 in 2018. There is very little seasonality in the sales pattern through the year. The company’s tax rate is 30%. The general ledger for 2018 has not yet been closed.

Required:

Record any adjusting journal entries required to correct Prescott’s books. Include the effect of income taxes.