In December Year 1, Lucas Corporation sold merchandise for $10,000 cash. Lucas estimated that the warranty obligation relating to this sale is $700. On February 12, Year 2, Lucas paid cash of $550 to settle a related warranty claim by this customer. Which of the following summarizes the effect of the payment of cash to settle the warranty claim in Year 2 on the financial statements?

Question

Quizplus · Accepted Answer

The payment of cash to settle the warranty claim in Year 2 will decrease Lucas Corporation's cash balance by $550. It will also decrease the warranty obligation by the same amount, reducing the liability. This will result in a decrease in total liabilities and equity, and therefore in total assets, by $550. The effect of this transaction on Lucas Corporation's financial statements is summarized in Option B. Option A, Option C, and Option D do not accurately reflect the effect of this transaction on the financial statements.

In December Year 1, Lucas Corporation Sold Merchandise for $10,000