A company sold $12,000 worth of bicycles with an extended warranty. The company's experience is that warranty expense averages 2% of sales. The current period's entry to record the warranty expense is:

Question

Quizplus · Accepted Answer

The best choice to record the warranty expense is to debit Warranty Expense for $240 and credit Estimated Warranty Liability for $240. This entry recognizes the cost of providing warranty services to the customers and creates a liability for the company that it can use to cover future warranty claims. Option E correctly reflects this treatment. Option A is incorrect because it debits Prepaid Warranties, which is not an appropriate account to use in this situation. Option B is incorrect because it credits Estimated Warranty Liability instead of debiting it. Option C is incorrect because it debits Estimated Warranty Liability instead of Warranty Expense. Option D is incorrect because it does not create a liability for future warranty claims.

A Company Sold $12,000 Worth of Bicycles with an Extended