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Pleasant Co. currently relies upon third-party service providers to repair products under assurance-typed warranties and...

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Question

Accounting

Pleasant Co. currently relies upon third-party service providers to repair products under assurance-typed warranties and is considering opening service locations.

Opening service locations would require significant fixed asset investment but would be less expensive per repair.

Discuss the impact on the balance sheet and impact on any two liquidity ratios of moving from a per unit more expensive third-party service provider to a less expensive in-house warranty servicing in an e-mail format to your hypothetical manager.

Suggested approach to answer this question:

  • Consider where Pleasant Co. would gather funds for the investment in fixed assets to open service locations and its effects on the balance sheet.
  • Write out the journal entries for assurance-typed warranties and think of how the estimates in the journal entries are affected by this proposed change.

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