During Year 1,its first year of operations,Benitez Co.reported sales of $800,000.At the end of Year 1,the company estimated its warranty obligation at 3% of sales.During Year 1,the company paid $13,000 cash to settle warranty claims.Which of the following statements is true?

Question

Quizplus · Accepted Answer

Year 1 Warranty expense = $800,000 × 3% = $24,000
Accruing the warranty obligation increases liabilities (warranties payable) and increases expenses (warranty expense) by $24,000. Settlement of the warranty claims decreases assets (cash) and decreases liabilities (warranties payable) by $13,000. Thus, at the end of Year 1, the warranties payable account has a balance of $11,000 ($24,000 ? $13,000).
Cash decreases by $13,000 when the warranty obligations are settled.

During Year 1,its First Year of Operations,Benitez Co