A company sold $12,000 worth of bicycles with an extended warranty.The company's experience is that warranty expense averages 2% of sales.The current period's entry to record the warranty expense is:
A)Debit Warranty Expense $240; credit Cash $240.
B)Debit Prepaid Warranties $240; credit Warranty Expense $240.
C)Debit Estimated Warranty Liability $240; credit Cash $240.
D)Debit Sales Allowances $240; credit Estimated Warranty Liability $240.
E)Debit Warranty Expense $240; credit Estimated Warranty Liability $240.

Question

Quizplus · Accepted Answer

The entry to record the warranty expense would involve debiting Warranty Expense and crediting Estimated Warranty Liability. This is because the warranty expense is an estimated future expense that needs to be recognized in the current period. Debiting Warranty Expense increases expenses, while crediting Estimated Warranty Liability increases liabilities. This is the most appropriate choice. Choice A is incorrect because it incorrectly credits cash. Choice B is incorrect because it involves debiting Prepaid Warranties, which is not appropriate since the expense has not yet been incurred. Choice C is incorrect because it involves debiting Estimated Warranty Liability, which is already a liability account. Choice D is incorrect because Sales Allowances would not be the appropriate account to debit for warranty expense recognition.

A Company Sold $12,000 Worth of Bicycles with an Extended