These types of threads are always interesting. For some reason I feel like we aren't getting the complete story.
As others have stated multiple times, Apple has nothing to gain by breaking your phone while working on it and not offering to make the situation right.
That’s exactly why we were frustrated, but the employees are simply following policy. This is fair to them and completely within their right, though it goes against the ideology Apple has, or would like us to believe they have, as a company.
They were following a formula of => See water damage => Phone is blacklisted => Phone must be replaced for $500
This would be completely great, actually I would’ve preferred it had the phone been returned in its original working condition. Less waste, no loss, no iTunes backups and restores. Unfortunately it was not, and Delilah at AppleCare agreed.
We went to the store today and they were quick to pull up the file and see an authorization to do the swap free of charge. Total appointment was less than ten minutes and very smooth. Apple has made up for the issue more than we could expect!
Thanks everyone for the input, we’re glad it was resolved amicably. Many lessons learned