Question 5 (7 marks)

After manufacturing for many years, Paradigm Company has developed consistent data from which to assess their warranty claims. In 2019 they started to accrue their warranty costs to match the revenues using an assurance type method. They have determined that estimated warranty costs for their two-year warranty can be reasonable based on total sales factoring the following probabilities:

Year 1 2% of sales

Year 2 3% of sales

Sales and actual warranty expenditures for the first three years of business were:

		Sales		Warranty Expenditures
2019		$987,000		$19,740
2020		$963,000		$48,870
2021		$1,053,000		$44,685

1. Prepare the adjusting entries for 2021 and provide the liability balance for 2021.
2. How would your approach change if the company used another method to determine warrant expenses?