Extra Supplies had sales of $240,000 in Year 1. Extra warrants its products and estimates warranty expense to be 3% of sales. Which of the following shows how the year-end adjusting entry would affect the company's assets, liabilities, and stockholders' equity?

Question

Quizplus · Accepted Answer

The adjusting entry for warranty expense will increase the warranty expense account (an expense account) and increase the warranty liability account (a current liability account). This will decrease retained earnings, which in turn will decrease the company's stockholders' equity. Option B correctly shows these changes by increasing the warranty expense account by $7,200, increasing the warranty liability by $7,200, and decreasing retained earnings by $7,200, resulting in a decrease in stockholders' equity by $7,200. Options A, C, and D do not correctly show the impact of the adjusting entry on the company's assets, liabilities, and stockholders' equity.

Extra Supplies Had Sales of $240,000 in Year 1