Indicate whether each of the following statements is true or false.________ a) The extension of a warranty on goods sold normally represents a legal obligation to the seller of the goods.________ b) The entry to recognize the warranty obligation increases the Warranties Payable account and decreases a revenue account.________ c) The entry to record the payment of cash to settle a warranty claim increases expenses (Warranties Expense) and decreases liabilities (Warranties Payable).________ d) Net income is not affected by the entry to record the payment of cash to settle a warranty claim.________ e) Total assets are not affected by the adjusting entry to record the warranty obligation.

Question

What will be an ideal response?

Answer 1

a) T b) F c) F d) T e) T

a) This is true. Offering a warranty creates a legal obligation on the part of the seller. 
b) This is false. The adjusting entry increases liabilities (warranties payable) and expenses (warranty expense). The adjusting entry does not decrease revenue. 
c) This is false. The entry decreases assets (cash) and decreases liabilities (warranties payable). 
d) This is true. The entry to record warranty work does not affect revenues or expenses; thus, it does not affect net income. 
e) This is true. The adjusting entry is a claims exchange transaction that increases liabilities (warranties payable) and decreases stockholders' equity (retained earnings). It increases expenses (warranty expense), which decreases net income.