Problem 6 During 2012, BB Inc. sold 500 MP3 players. Each customer paid $120 for their MP3 player. Each MP3 has a warranty that covers repairs over the following 2 years. BB Inc. estimates that 2% of the MP3 players may need to be repaired during the following 2 years. The total cost of repairing each MP3 player is $30 ($20 for new parts and $10 for labor). During 2012, the company repaired 4 MP3s sold in 2011 that were under warranty. BB Inc. uses the accrual basis to estimate warranty liabilities.

a. Determine the impact on the accounting equation for warranty expense for 2012.

b. Determine the impact on the accounting equation for fulfilling the warranty (making the repairs) in 2012.

c. What is reported on the 12/31/2012 balance for warranty liability? Assume the ending balance in the warranty liability on 12/31/2011 was $700.