Question 2 (25 points):

Totally Honest Dave and Co. is a very successful seller of used home appliances. All washing machines come with a four year warranty allowing for the complete repair or replacement of the appliance. The Company uses a warranty servicing firm to service the payment of specific warranty obligations, with amounts for the year due on December 31. Honest Dave has traditionally observed that warranty expenses will be 1.3% in the first year following the sale, 2.7% in the second year, and 4.7% in the third year, and 7.8% in the fourth year. Honest Dave had sales of $782.74 million in 2016 and had a balance in the Estimated Warranty Liability account of $7 million. On December 31, 2016, Honest Dave received a bill from the warranty servicing firm for $13 million. Looking through the detail, Honest Dave sees that $5 million are for sales prior to 2016. The firms normal discount rate, calculated as its weighted-average cost of capital, is 5%. Calculate the adjusting entry for warranties for 2016.