Question

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

Estimated Warrenty Payable

Beg Bal 3000

Sales Revenue

110,000

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)

Answer 1

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.