A firm sells a remarkable product, which serves many household purposes. The firm is confident about its product and is so anxious to sell a large number of units that it grants a 3-year warranty. The warranty agreement specifies that any malfunction or other problem will be fixed at no cost to the customer, unless the customer has abused the product. Based on experience with other household products it has sold in the past, 3% of total units sold will require service over the warranty period at an average cost of 200 per unit. The following information relates to the first two years of the product's life: Year 1 Year 2 Unit sales 20,000 5,000 Actual warranty costs incurred 35,000 $ 80,000 What is the balance of the warranty liability account at January 1, Year 3? Assume that the company did not revise its estimate of future warranty claims frequency. According to me, the answer should be $35,000 but the book answer is $155,000 computed as below. I don’t understand why they add $25,000 to $20,000? Ans: January 1, 20x3 warranty liability balance = (20,000 + 25,000).03($200) - $35,000 - $80,000 = $155,000