Reference no: EM132523006

Question - Reliance Company manufactures and sells wireless cell phones, which is guarantees for five years. If a cell phone fails, it is replaced for free, but the customer is charged a service fee for handling. In the past, management has found that only 3 percent of the cell phones of sold required replacement under the warranty. The average cell phone costs the company $240. At the beginning of September, the account for estimated liability for product warranties had a credit balance of$208,000. During September, 250 cell phones were returned under warranty. The company collected$9,860 of service fees for handling. During the month, the company sold 2,800 cell phones.

Required -

1. Prepare journals entries to record (a) the cost of cell phones replaced under warranty and (b) the estimated liability for product warranties for cell phones sold during the month.

2. Compute the balance of the estimated product warranty liability at the end of the month.

3. If the company's product warranty liability is underestimated, what are the effects on current futures years income.