Hiatt Company sells automatic can openers under a 75-day warranty for defective merchandise. Based on past experience, Hiatt estimates that 3% of the units sold will become defective during the warranty period. Management estimates that the average cost of replacing or repairing a defective unit is $20. The units sold and units defective that occurred during the last 2 months of 2010 are as follows.

Month	Units Sold	Units Defective Prior to December 31
November	30,000	600
December	32,000	400

Determine the estimated warranty liability at December 31 for the units sold in November and December.

Prepare the journal entries to record the estimated liability for warranties and the costs incurred in honoring 1,000 warranty claims. (Assume actual costs of $20,000.)

Give the entry to record the honoring of 500 warranty contracts in January at an average cost of $20.

Q2: The following financial data were reported by 3M Company for 2006 and 2007 ($ in millions).

3M COMPANY
Balance Sheets (partial)
	2007	2006
Current assets
Cash and cash equivalents	$1,896	$1,447
Accounts receivable, net	3,362	3,102
Inventories	2,852	2,601
Other current assets	1,728	1,796
Total current assets	$9,838	$8,946
Current liabilities	$5,362	$7,323

Calculate the current ratio and working capital for 3M for 2006 and 2007.(Round current ratio to 2 decimal places, e.g. 10.50.)

Suppose that at the end of 2007 3M management used $200 million cash to pay off $200 million of accounts payable. How would its current ratio and working capital have changed? (Round current ratio to 2 decimal places, e.g. 10.50.)