Benitez Co. had sales of $800,000 in Year 1. The company expects to incur warranty expenses amounting to 3% of sales. There were $13,000 of warranty obligations paid in cash during Year 1. Based on this information:

Question

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$800,000 × 3% = $24,000 warranty expense is recognized in Year 1. Cash decrease by $13,000 when the warranty obligations are paid. Warranties payable increases by $24,000 when warranty expense is recognized and decreases by $13,000 when warranty obligations are paid, for a net increase of $11,000.