The Chair Company provides a 120-day parts-and-labor warranty on all merchandise it sells. The Chair Company estimates the warranty expense for the current period to be $2,650. During this period, a customer returned a product that cost $1,830 to repair.

Required
a. Show the effects of these transactions on the financial statements using a horizontal statements model like the example shown next. Use + for increase, − for decrease, and NA for not affected. In the Statement of Cash Flows column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA).

b. Discuss the advantage of estimating the amount of warranty expense.

Transcribed Image Text:

Balance Sheet + Stk. Equlty Income Statement Exp. Statement of Cash Flows Assets Llab. Net Inc. Rev.