Platinum Corp. uses the expense approach to account for warranties. They sell a used car for $ 30,000 on Oct 25, 2020, with a one-year warranty covering parts and labour. Warranty expense is estimated at 2% of the selling price, and the appropriate adjusting entry is recorded at Dec 31, 2020. On March 12, 2021, the car is returned for warranty repairs. This cost Platinum $ 200 in parts and $ 120 in labour. When recording the March 12, 2021 transaction, Platinum would debit Warranty Expense with
A) zero.
B) $ 120.
C) $ 200.
D) $ 320.

Question

Quizplus · Accepted Answer

Since Platinum Corp. uses the expense approach and has already estimated and recorded the warranty expense at the end of 2020 based on the selling price, the actual costs incurred for warranty repairs in 2021 are not debited to Warranty Expense. Instead, they would reduce the liability established for the estimated warranty costs. Therefore, no additional expense is recognized at the time of repair.