In December Year 1, Lucas Corporation sold merchandise for $10,000 cash. Lucas e
ID: 2539298 • Letter: I
Question
In December Year 1, Lucas Corporation sold merchandise for $10,000 cash. Lucas estimated that $700 of warranty claims might be filed in regard to these sales. On February 12, Year 2, warranty work amounting to $550 was performed for one of the customers ($430 labor paid in cash and $120 from the materials inventory).
Which of the following answers indicates the effect of the February 12, Year 2 transaction on the financial statements of Lucas Corporation?
Choice A
Choice B
Choice C
Choice D
Assets = Liab. + Equity Revenue Expense = Net Inc. Cash flow A. (430) = (550) + (120) NA 120 = (120) (430) OA B. (550) = (550) + NA NA NA = NA (430) OA C. (550) = (550) + NA NA 550 = (550) (430) FA D. (550) = NA + (550) NA 550 = (550) (430) OAExplanation / Answer
Correct Answer - Option B
On 12th February following transation would have happened.
Warranty Provision which was created for $ 700 in december 2017 will be utilised to the extent of $ 550 and its remaining balance will be $ 150. This means the liability is decreased by $ 550.
Cash will be reduced by $ 430 & inventory will also be reduced by $ 120. Total reduction in asset is $ 550.
There will not be any impact in Revenue & Expense side because the entire provision $ 700 has already been debited to Expenses.