Question

1.

Baker Co. had sales of $300,000 in 2016. The company expects to incur warranty expenses amounting to 3% of sales. There were $6,000 of warranty obligations paid in cash during 2016. Based on this information:

1.

Warranty expenses would decrease net earnings by $9,000 in 2016.

2.

Assets would decrease by $6,000 as a result of the accounting events associated with warranties in 2013.

3.

Total warranty obligations would increase by $3,000 in 2016.

4.

All of these.

2.

In December 2016, Lucky Corporation sold merchandise for $5000 cash. Lucky estimated that $350 of warranty claims might be filed in regard to these sales. On February 12, 2017, warranty work amounting to $275 was performed for one of the customers ($215 labor paid in cash and $60 from the materials inventory).

How much is the warranty obligation at the end of 2016 on the financial statements of Lucky?

	1.	Credit Warranty Payable 350, Debit Warranty Expense of 350.
	2.	Credit cash 350, Debit Warranty Expense 350.
	3.	Credit cash of 275, debit warranty expense of 275
	4.	None of the above

Answer 1

1

Warranty expense during the period = 300000*3%=$9000

Warranty expenses would decrease net earnings by $9,000 in 2016.

Assets would decrease by $6,000 as a result of the accounting events associated with warranties in 2013.

Total warranty obligations would increase by $3,000 in 2016.

Option D All of these is the correct option

2

The journal entry for warranty expense is:

Credit Warranty Payable 350, Debit Warranty Expense of 350.

Warranty obligation at the end of 2016 on the financial statements of Lucky = $350