Indicate whether each of the following statements is true or false.
a)The extension of a warranty on goods sold normally represents a legal obligation to the seller of the goods.b)Recognizing the warranty obligation increases the Warranties Payable account and decreases a revenue account.c)Recording the payment of cash to settle a warranty claim increases expenses (Warranties Expense)and decreases liabilities (Warranties Payable).d)Net income is not affected by the payment of cash to settle a warranty claim.e)Total assets are not affected by the adjustment to record the warranty obligation.

Question

Quizplus · Accepted Answer

b)False c)False d)True e)Ta)This is true. Offering a warranty creates a legal obligation on the part of the seller.b)This is false. Recognizing the warranty obligation increases liabilities (warranties payable)and expenses (warranty expense). It does not decrease revenue.c)This is false. Recording the payment of cash to settle a warranty claim decreases assets (cash)and decreases liabilities (warranties payable).d)This is true. Recording warranty payments does not affect revenues or expenses; thus, it does not affect net income.e)This is true. The adjustment is a claims exchange transaction that increases liabilities (warranties payable)and decreases stockholders' equity (retained earnings). It increases expenses (warranty expense), which decreases net income.

Indicate Whether Each of the Following Statements Is True or False