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

Question 45

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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.

Premises:

Responses:

The adjustment to record the warranty at the end of Year 1 did not affect Clarion's revenue for the year.

False

The $250 payment to satisfy a warranty claim in July of Year 2,decreased Clarion's total liabilities.

True

Clarion's adjustment to record the warranties at the end of Year 1 increased Clarion's total liabilities.

Clarion's adjustment to record the warranty at the end of Year 1 decreased total assets and total stockholders' equity.

The transaction,dated in July of Year 2,decreased total assets and net income for Year 2.

Premises:

The adjustment to record the warranty at the end of Year 1 did not affect Clarion's revenue for the year.

The $250 payment to satisfy a warranty claim in July of Year 2,decreased Clarion's total liabilities.

Clarion's adjustment to record the warranties at the end of Year 1 increased Clarion's total liabilities.

Clarion's adjustment to record the warranty at the end of Year 1 decreased total assets and total stockholders' equity.

The transaction,dated in July of Year 2,decreased total assets and net income for Year 2.

Responses:

False

True

Correct Answer:

Premises:

Responses:

The adjustment to record the warranty at the end of Year 1 did not affect Clarion's revenue for the year.

The $250 payment to satisfy a warranty claim in July of Year 2,decreased Clarion's total liabilities.

Clarion's adjustment to record the warranties at the end of Year 1 increased Clarion's total liabilities.

Clarion's adjustment to record the warranty at the end of Year 1 decreased total assets and total stockholders' equity.

The transaction,dated in July of Year 2,decreased total assets and net income for Year 2.

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