Bears Inc.sells football helmets to local schools and warrants all of its products for one year.While no helmets sold in 2018 have been returned 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 2018?
A)A decrease in assets and decrease in stockholders' equity.
B)No journal entry is necessary until products under warranty are returned.
C)An increase in stockholders' equity and a decrease in liabilities.
D)A decrease in stockholders' equity and an increase in liabilities.

Question

Quizplus · Accepted Answer

Offering a warranty creates a liability because the company will need to either repair or replace any defective products. Therefore, there would be an increase in liabilities. Additionally, since there is a possibility that some products will need to be repaired or replaced, this increases the risk that the company will incur expenses in the future, which would decrease stockholders' equity.

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