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In December Year 1, Lucas Corporation sold merchandise for $10,000 cash. Lucas estimated that the warranty obligation relating to this sale is $700. On February 12, Year 2, Lucas paid cash of $550 to settle a related warranty claim by this customer.
-Which of the following summarizes the effect of the recognition of the warranty obligation to the customer who purchased this merchandise on the elements of the Year 1 financial statements?

Question

Quizplus · Accepted Answer

Estimating future warranty costs related to Year 1 sales increases liabilities (warranties payable) and decreases stockholders' equity (retained earnings). It increases expenses (warranty expense), which decreases net income. It does not affect the statement of cash flows.

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