The accounting records of Clay?\'s Appliances included the following balances at

Question

The accounting records of Clay?'s Appliances included the following balances at the end of the? period:

Estimated Warrenty Payable

Sales Revenue

Warranty Expense

In the? past,Clay?'s warranty expense has been 7% of sales. During the current period?, the business paid $4,000 to satisfy the warranty claims.

(The accounts to choose from in a-b are Accounts payable, Cash, Estimated warranty payable, Sales Revenue, Sales tax payable, and Warranty expense.)

a) Journalize Clay?'s warranty expense

b) Journalize the warranty payments

c) Show what the company would report on its income statement at the end of the period. (Choose from Estimated warranty payable, Sales Revenue, and Warranty Expense.)

d) Show what the company would report on its balance sheet at the end of the period. (Choose from Current Assets, Current Liabilities, Estimated warranty payable, Sales Revenue, and Warranty expense.)

e) Which data item will affect Clay?'s current? ratio? (Choose from Estimated warranty payable, Sales revenue, and Warranty expense.)

f) Will Clay?'s current ratio increase or decrease as a result of an increase in the item from (e)

Explanation / Answer

Req a: Warranty expense Account Dr. (110,000 *7%) 7,700        Warranty Expense payable Account 7,700 Req b: Warranty Expense Payable Account Dr. 4000        Cash account 4,000 Req c: Income Statement: Revenue: Sales revenue 110000 Expense: Warranty expense 7700 Req d: Current liabilities: Warranty expense payable 6700 (3000+7700-4000) Req e: Warranty expense payable of $6700 will affect the current ratio. Req f: Current ration will decrease As the warranty expense payable is a current liability and its ending balance increases as compared to beginning Therefore, current liability increases (which is a denominatr) hence, the current ratio decreases.

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