The Dix Company Recorded an Estimated Liability for Warranty Claims

question 86

Multiple Choice

The Dix Company recorded an estimated liability for warranty claims related to its 2016 sales of farming machinery of $5,000,000 in its 2016 balance sheet. The warranty allows customers to get free repairs for one year. By the end of 2017, the company had paid $5,040,000 of claims. It had no further liability for repairs for the 2016 sales after 2017. In the 2017 income statement, the company should recognize

• A) $40,000 of related expense
• B) A benefit in its income statement of $40,000 related to these warranties
• C) Warranty expense in its income statement of $5,040,000
• D) Neither a benefit or an expense

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Definitions:

Excess Supply

The situation where the quantity of a good or service supplied exceeds the quantity demanded at the current price.

Absolute Advantage

The ability of an entity to produce a good or perform a service at a lower cost per unit than another entity with the same resources.

Gains From Trade

The economic benefits or advantages that arise from trading goods, services, or resources between individuals, organizations, or countries, typically resulting from specialization and the division of labor.

Comparative Advantage

The ability of an entity to produce goods or services at a lower opportunity cost than others, leading to more efficient trade possibilities.