For the following transactions of the We-Have-Liabilities Company, state the dol
ID: 2420783 • Letter: F
Question
For the following transactions of the We-Have-Liabilities Company, state the dollar effect on the firm's total liabilities. (These transactions should be considered separately from each other.)
The firm spends $6,000 to make repairs to some of the products it had previously sold. The products are still under warranty, so that the repairs are free to the customers who bought the products. The firm recognizes warranty expense at the time of sale.
The firm recognizes sales of $1,200,000 for the year. Warranty expenditures associated with the products sold are expected to total 4% of sales.
Explanation / Answer
When the firm spends $6,000 to make repairs to the products it had previously sold that are still under warranty, the firms accrued warranty liabilitiy will decrease by $6,000 and as a result the firm's total liabilties will also decrease by $6,000.
Warranty expenses associated with the sales are recorded by debiting warranty expense account and crediting accrued warrantry account. Thus, as soon as the sales are recognized the warranty expense and warranty liabilities are also recognized. Therefore, this transaction will increase the firm's total liabilities by $48,000 ($1,200,000*4%).