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Swift Corp. prepares its financial statements for its fiscal year ending December 31, year 1. Swift estimates that its product warranty liability is $28,000 at December 31, year 1. On February 12, year 2, before the financial statements were issued, Swift received information about a product defect that will require a recall of all units sold in year 1. It is expected the product recall will cost an additional $40,000 in warranty repairs. What should Swift present in its December 31, year 1 financial statements? Group of answer choices

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Answer:

C) An estimated warranty liability of $68,000.

Explanation:

Since Swift will record an estimate of warranty expense, it must also include the costs of the new recall. It's warranty liability account already had a credit balance of $28,000, but it must be adjusted to show the real estimated costs = $28,000 + $40,000 = $68,000. Therefore, warranty liability should have a $68,000 credit balance in the balance sheet.