Bears Inc.sells football helmets to local schools and warrants all of its products for one year.While no helmets sold in 2012 have been returned to them yet,based upon previous years,Bears Inc.estimates that 3% of its products will need repairs or be replaced within the next year.What effect would this warranty have on assets,liabilities,and stockholders' equity in 2012?

Question

Quizplus · Accepted Answer

The warranty represents an obligation that Bears Inc. has to repair or replace any faulty helmets within the next year. Therefore, it creates a liability for the company, which should be recorded in their financial statements. This will result in an increase in liabilities and a decrease in stockholders' equity, as the company will need to set aside resources to cover any future warranty claims. No effect will be seen on assets until the helmets are returned and repaired or replaced.

Bears Incsells Football Helmets to Local Schools and Warrants All of of Its