Clarion Company provides a one-year warranty on all merchandise it sells. In Year 1, the company recorded sales of $500,000. It estimated that the warranty costs on these sales would amount to $2,000. In July of Year 2, Clarion paid $250 to satisfy a warranty claim. Indicate whether each of the following statements is true or false.
a)Clarion's adjustment to record the warranty at the end of Year 1 decreased total assets and total stockholders' equity.b)Clarion's adjustment to record the warranties at the end of Year 1 increased Clarion's total liabilities.c)The transaction, dated in July of Year 2, decreased total assets and net income for Year 2.d)The $250 payment to satisfy a warranty claim in July of Year 2, decreased Clarion's total liabilities.e)The adjustment to record the warranty at the end of Year 1 did not affect Clarion's revenue for the year.

Question

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b)True c)False d)True e)Ta)This is false. The adjustment would increase liabilities (warranties payable)and decrease stockholders' equity (retained earnings). It increases expenses (warranty expense), which decreases net income.b)This is true. The adjustment would increase liabilities (warranties payable).c)This is false. The payment of $250 to satisfy the warranty claim decreased assets (cash)and decreased liabilities (warranties payable).d)This is true. The $250 payment decreases warranties payable, a liability.e)This is true. The adjustment would increase liabilities (warranties payable)and decrease stockholders' equity (retained earnings). It increases expenses (warranty expense), which decreases net income. It does not affect revenue.

Clarion Company Provides a One-Year Warranty on All Merchandise It