In its first year operation in 2020, Macy Furniture sells a line of products that carry a three-year warranty against defects at no extra charge. Based on industry experience, the estimated warranty costs are as follows: first year following the year of sale, 1% of sales; second year following the year of sale, 3% of sales; and third year following the year of sale, 5% of sales. Sales and actual warranty expenditures for 2020 were $200,000 and $1,500, respectively.

The amount of warranty liability that Macy Furniture should report on the balance sheet at the end of 2020 is

a. $19,500.

b. $16,500.

c. $1,500.