The Auditor for Universal Tools, Inc $$\begin{array} { | c | r | r | } \hline \text { Warranty Liability } & 25,000 & \\\hline \text { Warranty Expense } & & 25,000 \\\hline\end{array}$$

question 105

Multiple Choice

The auditor for Universal Tools, Inc. discovered in 2019 that the warranty liability account showed a $25,000 debit balance. She investigated and discovered that the 2% estimate based on sales for warranty expense was recorded and understated, and it was more likely 3.5%. Sales for 2019 were $6,000,000. What is the appropriate journal entry as a result of this discovery?

• A) \[\begin{array} { | c | r | r | }
• \hline \text { Warranty Liability } & 25,000 & \\
• \hline \text { Warranty Expense } & & 25,000 \\
• \hline
• \end{array}\]
• B) \[\begin{array} { | c | r | r | }
• \hline \text { Warranty Expense } & 90,000 & \\
• \hline \text { Warranty Liability } & & 90,000 \\
• \hline
• \end{array}\]
• C) \[\begin{array} { | c | r | r | }
• \hline \text { Warranty Liability } & 90,000 & \\
• \hline \text { Warranty Expense } & & 90,000 \\
• \hline
• \end{array}\]
• D) \[\begin{array} { | c | r | r | }
• \hline \text { Warranty Expense } & 210,000 & \\
• \hline \text { Warranty Liability } & & 210,000 \\
• \hline
• \end{array}\]

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Definitions:

IRR

Internal Rate of Return, a financial metric used to assess the profitability of investments by calculating the interest rate that makes the net present value of all cash flows equal to zero.

Decision Rules

Guidelines or criteria used to make choices among alternatives in decision-making processes.

Cost of Capital

Cost of capital refers to the minimum rate of return that a company must earn on its investments to maintain its market value and satisfy its stakeholders.

Future Cash Flows

Estimates of the amount of money to be received or paid out in the future by an entity.