Question

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.

Answer 1

The correct entry to record the warranty expense is Debit Warranty Expense $240; credit Estimated Warranty Liability $240.

Step-by-step explanation:

The correct entry to record the warranty expense for the company is:

Debit Warranty Expense $240; credit Estimated Warranty Liability $240.

The $240 is determined by multiplying the total sales ($12,000) by the estimated warranty work percentage (2% = 0.02).

This entry recognizes the expense incurred for potential warranty claims and establishes a liability for those claims.