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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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To record warranties, the adjusting journal entry would be

a. a debit to Warranty Liability and a credit to Warranty Expense.

b. a debit to Warranty Expense and a credit to Warranty Liability.

c. a debit to Warranty Expense and a debit to Cash.

d. a debit to Warranty Liability and a credit to Cash.

To determine

Concept introduction:

Liabilities:

Liabilities are the obligation of the business or amount payable by the business. Liabilities can current or long term. Current liabilities are liabilities payable within the short term or business cycle of the company, for example Accounts payable for purchases and utilities payable. Long term liabilities are liabilities payable in a long period/ years, for example long term loan.

A contingent liability is a future liability that is dependent upon happening or not happening of an uncertain future event. For example: Amount to be paid if the case running in the court is lost.

A contingent liability is recognized as a liability when it is probable and its reasonable amount can estimate. For example: Amount to be paid the company knows it has lost the case

To choose:

The correct option of adjusting journal entry to record the warranties.

Explanation

Explanation for correct answer:

The warranty expense is recorded as soon as the sale in made. The journal entry to record the warranties includes a debit to the warranty expense and a credit to the warranty liability. Hence the correct option is b.

Explanation for incorrect answers:

a. The journal entry to record the warranties includes a debit to the warranty expense and a credit to the warranty liability...

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