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Company A started the year 2020 with $17,500 of Warranty Payable. During 2020 it spent $10,550 in cash to satisfy warranty claims. Company A made

Company A started the year 2020 with $17,500 of Warranty Payable. During 2020 it spent $10,550 in cash to satisfy warranty claims. Company A made $125,000 of sales in 2020 and it estimates that warranty costs are 10% of sales.

a. What are the financial statement effects of warranty expense recognition in 2020?

Assets

=

Liabilities

+

Equity

Sales

-

Expenses

=

Profit

b. What is the ending value of Warranty Payable reported on the 2020 Balance Sheet?

c. If instead Company A 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 2020 (give both direction and amount)?

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