A company sold $12,000 worth of bicycles with an extended warranty.It estimates that 2% of these sales will result in warranty work.The current period's entry to record the warranty expense is:
A)Debit Warranty Expense $240;credit Cash $240.
B)Debit Prepaid Warranties $240;credit Warranty Expense $240.
C)Debit Estimated Warranty Liability $240;credit Cash $240.
D)Debit Sales Allowances $240;credit Estimated Warranty Liability $240.
E)Debit Warranty Expense $240;credit Estimated Warranty Liability $240.

Question

Quizplus · Accepted Answer

The company estimates that 2% of the sales will result in warranty work, so they need to record an expense for that estimated amount. The correct entry to record this expense is to debit Warranty Expense and credit Estimated Warranty Liability. This is because the expense is being recognized in the current period, but the work may not be done until a future period. Debiting the Estimated Warranty Liability account also indicates that the company owes something to its customers in terms of warranty work, but has not yet paid it.

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