QUESTION 2: (10 marks) During its first year of operations XYZ had sales of $86,500. The company offers a 2- year limited warranty on all sales and expects that warranty costs for the first year will average 1% of sales with an additional 1.5% in the second year. During the current year the company spent $2,000 on warranty repairs. Required:

1. Prepare all journal entries related to the warranty for the current year.

2. How will the warranty liability be reported on the company's year-end balance sheet?