A Company Estimates That Warranty Expense Will Be 4% of Sales

question 78

Multiple Choice

A company estimates that warranty expense will be 4% of sales. The company's sales for the current period are $185,000. The current period's entry to record the warranty expense is:

• A) Debit Warranty Expense $7,400; credit Sales $7,400.
• B) Debit Warranty Expense $7,400; credit Estimated Warranty Liability $7,400.
• C) Debit Estimated Warranty Liability $7,400; credit Warranty Expense $7,400.
• D) Debit Estimated Warranty Liability $7,400; credit Cash $7,400.
• E) No entry is recorded until the items are returned for warranty repairs.

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Definitions:

Book Balance

The amount of money on record in a company’s financial accounts, often compared to the available cash balance to identify discrepancies.

Average Daily Float

The average amount of uncollected checks in the process of clearing, representing the gap between bank records and available funds.

Checks

Written, dated, and signed instruments that direct a bank to pay a specific sum of money to the bearer or a named party.

Collection Delay

The time it takes for a business to receive payments owed by its customers after the sale or service has been delivered.