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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 reflects the effect of the year-end adjustment to record estimated warranty expense?

Question

Quizplus · Accepted Answer

The adjustment 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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