At the beginning of 2013, Scarlet Industries began offering a three-year warranty on its products.

The
warranty program was expected to cost Scarlet 2% of net sales, approximately equally over the three-
year warranty period. Net sales made under warranty in 2013 were $270 million. Thirteen percent of the
units sold were returned in 2013 and repaired or replaced at a cost of $2 million. This amount was
debited to warranty expense as incurred.

Required:

Prepare the appropriate adjusting entry to adjust warranty expense on December 31, 2013. Show
calculations.