During Year 1,its first year of operations,Benitez Co.reported sales of $800,000.At the end of Year 1,the company estimated its warranty obligation at 3% of sales.During Year 1,the company paid $13,000 cash to settle warranty claims.Which of the following statements is true?
A)Warranty expenses would decrease net earnings by $24,000 in Year 1.
B)Cash decreased by $13,000 as a result of the accounting events associated with warranties in Year 1.
C)The warranties payable account has a credit balance of $11,000 at the end of Year 1.
D)All of these answer choices are correct.

Question

Quizplus · Accepted Answer

Year 1 Warranty expense = $800,000 × 3% = $24,000
The entry to accrue the warranty obligation increases liabilities (credit warranties payable)and increases expenses (debit warranty expense)by $24,000.The entry for the settlement of the warranty claims decreases assets (credit cash)and decreases liabilities (debit warranties payable)by $13,000.Thus,at the end of Year 1,the warranties payable account has a credit balance of $11,000 (or credit of $24,000 ? debit of $13,000).
Cash decreases by $13,000 when the warranty obligations are settled.

During Year 1,its First Year of Operations,Benitez Co