Appliance Resellers Ltd. (ARL) sells gently used and refurbished appliances. The company provides a three-month warranty that is included in the cost of the appliance. Claims under the warranties vary from replacing defective parts to providing customers with new appliances if repairs cannot be made. During 2020, the estimated cost related to the three-month warranties was $38,000, of which $25,000 had been incurred before year end. ($19,000 on replacement appliances and $6,000 for parts) For an additional charge of $150, ARL also offers extended warranty coverage for three years on its refurbished appliances. This amount is expected to cover the costs associated with the extended warranties.
During 2020, ARL sold 500 three-year warranty plans. The costs incurred during the year for repairs and replacements under these plans amounted to $15,000. Based on experience, the company estimates that its total warranty costs over the three-year coverage period will be $45,000, which it expects will occur evenly over the warranty period.

Required

a. Prepare journal entries to record the warranty transactions for 2020.

b. Should Appliance Resellers Ltd. classify its warranty provision as current or non-current? Explain.

c. If the actual costs incurred by the company under the extended warranties are less than the amount charged for them, how should the company account for the difference?