Ian's Custom Surfboards supplies surfboards to Crazy Mama's Surf Shop. Ian's offers a one year warranty on all surfboards sold. They estimate that 2% of all surfboards sold each year may become defective.

Ian's provides a warranty whereby they will repair any surfboards that become defective. They estimate that the following is necessary to repair one defective board on average.

- 2 hours of labour @ $20 per hour

- $40 in supplies

The company sold 10,000 surfboards last year at an average price of $450 per board.

Required:

1. Prepare the journal entry to record the estimated warranty liability at year end. Their year end is December 31. (3)

2. Assume that 190 surfboards were actually returned after year end for warranty work. The actual costs to repair each board were 2.1 hours of labour @$21 per hour and supplies of $38. Prepare the journal entry to record the actual warranty claims. (3)

3. Were Ian's warranty estimates over or understated? (1)