The Snyder Company sells equipment with a warranty that it will work properly. Based on its historic experience, it expects the cost of honoring this warranty to be about 2% of sales. In 2014, it makes $300 million of sales. Assume all the warranties expire at the end of 2015. The actual costs to fix the equipment were $2,800,000 in 2014 and $3,300,000 in 2015.

A. What is the effect of the decision to record warranty expense in 2014 on Snyder’s assets, liabilities, and equity for 2014? Is income affected?

B. What is the effect of paying the 2014 claims on Snyder’s assets, liabilities, and equity in 2014? Is income affected by paying the claims?

C. What is the effect of paying the 2015 claims on Snyder’s assets, liabilities, and equity in 2015? Is income affected by paying the claims?

D. What is the effect of the warranties expiring in 2015 on Snyder’s assets, liabilities, and equity in 2015? Is 2015 income affected? (Hint—

when the warranties expire, the warranty reserve needs to be adjusted down to zero)

E. Over the course of two years, what did Snyder show as warranty expenses?

F. Over the course of two years, how much cash did Snyder pay for warranty costs?