The Clarion Company provides a one-year warranty on all merchandise it sells. In Year 1, the company recorded sales of $500,000. It estimated that the warranty costs on these sales would amount to $2,000. In July of Year 2, Clarion paid $250 to satisfy a warranty claim. Indicate whether each of the following statements is true or false.________ a) Clarion's adjusting entry recording the warranty at the end of Year 1 decreased total assets and total stockholders' equity.________ b) Clarion's adjusting entry recording the warranties at the end of Year 1 increased Clarion's total liabilities.________ c) The entries, dated in July of Year 2, decreased total assets and net income for Year 2.________ d) The entries, dated in July of Year 2, decreased Clarion's total liabilities.________ e) The

Question

adjusting entry recorded at the end of Year 1 did not affect Clarion's revenue for the year.

What will be an ideal response?

Answer 1

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

a) This is false. The adjusting entry would increase liabilities (warranties payable) and decrease stockholders' equity (retained earnings). It increases expenses (warranty expense), which decreases net income. 
b) This is true. The adjusting entry would increase liabilities (warranties payable). 
c) This is false. The payment of $250 to satisfy the warranty claim decreased assets (cash) and decreased liabilities (warranties payable). 
d) This is true. The entry decreases warranties payable, a liability. 
e) This is true. The adjusting entry would increase liabilities (warranties payable) and decrease stockholders' equity (retained earnings). It increases expenses (warranty expense), which decreases net income. It does not affect revenue.