E7-27. 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.

1. How much warranty expense must Canton report in its current-period income statement?

2. What warranty liability related to current-period sales will Canton report on its current period-end balance sheet? Assume that actual repair costs are as estimated. (Hint: Remember that some units were repaired in the current period.)

3. What analysis issues must we consider with respect to reported warranty liabilities?