Final answer:
The question pertains to recording the warranty expense in business accounting, specifically the practice of Dee's Appliances of estimating this expense at 7% of the sales. Warranty expenses represent estimated costs for future claims under product warranties.
Step-by-step explanation:
The question is related to an accounting concept in business known as warranty expense. Warranty expenses are estimated costs that a company expects to incur in the future, related to warranties for products it has sold. This estimation is necessary for accounting purposes to adhere to the matching principle, ensuring expenses match with the revenues of the same period. If Dee's Appliances has a trend of its warranty expense being 7%, this implies that for every sale, the company should record an expense equivalent to 7% of the sale as a warranty liability. This is an accrual accounting concept, which recognizes expenses when they are incurred (or estimated to be incurred) rather than when they are actually paid.
Warranty expense is typically found on the income statement as an operating expense. The method to estimate warranty expense often involves historical percentages of warranty claims or industry standards. Dee's Appliances seems to utilize historical data in determining its warranty expense at 7%.