Textbook Problem

Assurance-Type Warranty Clean-All Inc. sells washing machines with a 3-year assurance-type warranty. In the past, Clean-All has found that in the year after sale, warranty costs have been 3% of sales; in the second year after sale, 5% of sales; and in the third year after sale, 7% of sales. The following data are also available:

Required:

1. 1. Prepare the journal entries for the preceding transactions for 2019–2021. Closing entries are not required.
2. 2. What amount would Clean-All report as a liability on its December 31, 2021, balance sheet, assuming the liability had a balance of $88,200 on December 31, 2018?
3. 3. Next Level How would the failure to recognize a contingent liability affect the financial statements?