The adjusting entry required to recognize warranty expense will cause
A)assets and stockholders' equity to increase.
B)liabilities to decrease and stockholders' equity to increase.
C)assets and liabilities to decrease.
D)liabilities to increase and stockholders' equity to decrease.

Question

Quizplus · Accepted Answer

The adjusting entry to recognize warranty expense will increase the warranty expense (an expense account) and increase the warranty liability (a liability account). As a result, liabilities will increase and stockholders' equity will decrease. This is because the recognition of a warranty expense represents the company's obligation to perform repair or replacement services in the future, which increases the liability. The increase in expense reduces the net income, and hence the stockholders' equity.

The Adjusting Entry Required to Recognize Warranty Expense Will Cause