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 indicates the effect of the February 12, Year 2 transaction on the financial statements of Lucas Corporation?

Question

Quizplus · Accepted Answer

Paying $430 cash and using $120 of inventory to satisfy a warranty claim decreases assets (cash by $430 and inventory by $130) and decreases liabilities (warranties payable) by $550. The $430 outflow is reported as an operating activity on the statement of cash flows.

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