Question : Learning Objective 7-2 1) Brooke’s Bike Company sold $3,780 worth of : 1253363

Learning Objective 7-2

1) Brooke’s Bike Company sold $3,780 worth of mountain bikes in June. Warranty expense is estimated to be 2% of sales. During June, Brooke’s Bikes replaced two faulty parts under warranty. The parts cost a total of $100. The warranty expense for June was ________.

A) $65.60

B) $75.60

C) $100

D) $175.60

2) Brook’s Bike Company sold 80 mountain bikes during May. The company offered a one-year warranty. Future warranty expense was estimated to be $25 per bike. During May, the company spent $115 on parts and labor to repair three bikes that were under warranty. The warranty expense for May was ________.

A) $115

B) $345

C) $2,000

D) $2,115

3) In November, Mayberry Repair Shop spent $395 on parts to fix appliances under warranty. The $395 will be a reduction to ________.

A) Warranty liability

B) Warranty expense

C) Parts expense

D) Allowance for uncollectible accounts

4) Warranty expense is recognized when products are sold. This is required by the ________.

A) revenue recognition principle

B) matching principle

C) full disclosure principle

D) going concern principle

5) In its first month of business, Fish Nets, Inc. sold 8,000 nets with a three-month warranty for $10 each on account. Fish Nets estimates that 1% of its sales will be uncollectible and that warranty costs will be approximately $100 on its sales. Fish Nets’ financial statements should include ________.

A) Bad debts expense of $800 and Warranty expense of $100 on its income statement

B) Allowance for uncollectible accounts of $(80) and nothing for the warranties on its balance sheet

C) Bad debts expense of $80 and Warranty expense of $100 on its income statement

D) Allowance for uncollectible accounts of $(80) and Unearned warranty of $100 on its balance sheet

6) In May, Fish Nets, Inc. sold 8,000 nets with a three-month warranty for $10 each on account. Fish Nets estimates that warranty costs will be approximately $100 on these sales. The actual warranty cost for the sales made in May was $30 in June and $50 in July. Fish Nets should ________.

A) record Warranty expense of $100 in May

B) record Warranty expense of $30 in June

C) report Allowance for uncollectible accounts of $(100) in May

D) report Allowance for uncollectible accounts of $(30) in June

7) In May, Fish Nets, Inc. sold 8,000 nets with a three-month warranty for $10 each on account. Fish Nets estimates that warranty costs will be approximately $100 on these sales. What effect will the warranty adjusting entry have on Fish Nets’ current ratio?

A) It will cause the current ratio to increase.

B) It will cause the current ratio to decrease.

C) It will have no effect on the current ratio because the entry will cause the current assets to increase by $100 and the current liabilities to decrease by $100.

D) It will have no effect on the current ratio because no adjusting entry is made for estimated warranty costs.

8) Companies are required to recognize warranty expense at the time of sale due to the matching principle.

9) Brooke’s Bike Company sold 225 mountain bikes in October. The future estimated warranty cost for the bikes is $25 per bike.  The warranty period is one year. The amount of warranty expense for October is $468.75

10) Companies are required to recognize warranty expense in the period the goods are returned for repairs.