At the end of Year 1, Durango Company recognized its obligation under product warranties. During Year 2, it replaced products to its customers under the terms of the warranties. The Year 2 warranty settlements should be recorded as asset use transactions.

Question

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The Year 2 warranty settlements represent the fulfillment of the company's previously recognized warranty obligation, leading to a reduction in the liability and the use of assets (such as inventory or cash) to settle the warranty claims, thus being recorded as asset use transactions.

At the End of Year 1, Durango Company Recognized Its