Analyzing and Computing Accrued Warranty Liability and Expense Canton Company sells a motor that carries a 60-day unconditional warranty against product failure. From prior years' experience, Canton estimates that 3% of units sold each period will require repair at an average cost of $160 per unit. During the current period, Canton sold 100,000 units and repaired 2,400 of those units.

(a) How much warranty expense must Canton report in its current period income statement? $Answer

(b) What warranty liability related to current period sales will Canton report on its current period-end balance sheet? (Hint: Remember that some units were repaired in the current period.) $Answer

(c) What analysis issues must we consider with respect to reported warranty liabilities? (Yes or No)

Warranty liability at any given time should equal the actual dollar cost of repairs already paid for.

Warranty liability must always be assumed to exist and to be at least 2% of the value of expected sales.

Warranty liability at any given time should equal the expected dollar cost of repairs not yet paid for.

The issues to consider with respect to warranty liability are whether it actually exists and what is its correct magnitude.

Understating accrual of warranty liability overstates current period income at the expense of future income.

Understating accrual of warranty liability understates current period income to the benefit of future income.