Julia Used Cars Offers a One-Year Warranty from the Date

question 53

Multiple Choice

Julia Used Cars offers a one-year warranty from the date of sale on all cars it sells. From historic data, Bill Julia estimates that, on average, each car will require the company to incur warranty cost of $820. The cars sold for an average of $9,500 each. The following activities occurred during 2017.
$$\begin{array} { | l | l | l | } \hline \text { Feb } & 4 & \text { Sold five cars. } \\\hline \text { Mar } & 23 & \text { Sold ten cars. } \\\hline \text { May } & 20 & \text { Incurred warranty costs of \$6,000 an four cars sold in 2016. } \\\hline \text { July } & 6& \text { Sold eight cars. } \\\hline \text { Sep } & 1 & \text { Incurred warranty costs of \$5,000 on five cars sold in 2016. } \\\hline \text { Nov } & 14 & \text { Incurred warranty costs of \$4,000 on one car sold in 2016. } \\\hline \text { Dec } &2 2& \text { Sold twelve cars. } \\\hline\end{array}$$
If Julia accrued its warranty liability with a single adjusting entry at year-end, the journal entry would include:

• A)a debit to Warranty Liability for $28,700
• B)a debit to Warranty Expense for $28,700
• C)a credit to Parts for $17,220
• D)a credit to Cash for $28,700

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Definitions:

Cost Structure

The composition of a company’s costs, including fixed and variable costs, which impacts its profitability and pricing strategy.

Variable

A variable is an element, feature, or factor that is liable to vary or change; in business, it often refers to costs that fluctuate with the level of production or sales.

Fixed

Pertains to costs that remain constant regardless of the level of production or sales, such as rent, salaries, and insurance.

Fixed Costs

Costs that remain constant regardless of the amount of goods produced or sold within a specific timeframe, including rent, salaries, and insurance premiums.