In December Year 1, Lucas Corporation sold merchandise for $10,000 cash. Lucas estimated that $700 of warranty claims might be filed in regard to these sales. On February 12, Year 2, warranty work amounting to $550 was performed for one of the customers ($430 labor paid in cash and $120 from the materials inventory) . Which of the following answers correctly shows the effect of the recognition of the warranty obligation at the end of Year 1 on the financial statements of Lucas?

Question

Quizplus · Accepted Answer

The estimate of future warranty costs related to Year 1 sales increases expenses (warranty expense), which decreases net income and equity, and increases liabilities (warranties payable).

In December Year 1, Lucas Corporation Sold Merchandise for $10,000