Cycle Sales Company Offers Warranties on All Their Bikes

question 154

Multiple Choice

Cycle Sales Company offers warranties on all their bikes.They estimate warranty expense at 3.5% of sales.At the beginning of 2019,the Estimated Warranty Payable account had a credit balance of $1400.During the year,Cycle Sales had $299,000 in sales and had to pay out $5900 in warranty payments.How much Warranty Expense will be reported on the 2019 income statement?

• A) $5965
• B) $7300
• C) $9065
• D) $10,465

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Definitions:

Normal Balance

In accounting, the normal balance is the side (debit or credit) of an account that is usually increased. For example, asset accounts normally have a debit balance, while liabilities and equity accounts have a credit balance.

Direct Write-off Method

A method of accounting for bad debts that involves charging the amount of an uncollectible account directly to the expense account when it is deemed non-recoverable.

Uncollectible Receivables

Debts owed to a company that are considered to be uncollectable and are written off as a loss.

Debit Balance

Occurs when the total of debits in an account exceeds the total of credits, which can be typical for accounts like expenses, assets, and losses.