a. Surfs Up made $125,000 of sales in 2007. It guarantees its surf boards against defects for 2 years and estimates that warranty costs are 10% of sales. Whats the financial statement effect related to estimated warranties in 2007?

Assets

=

Liabilities

+

Equity

Sales

-

Expenses

=

Profit

b. Continued from above - Suppose the warranty payable was equal to $17,500 at the end of 2006. In 2007 Surfs Up paid $10,550 to satisfy warranty claims. What was the balance of the warranty payable at the end of 2007?

c. If instead Surfs up followed the policy of recording the warranty expense on the Income Statement only when the claim is satisfied, what would be the impact on the Pre-tax Income and on Cash Flows in 2007 (give both direction and amount)?