Post your explanation with your answer. Galaxy Corporation manufactures custom motorcycles. Galaxy finances the motorcycles over 36 months for customers who make a minimum down payment of 10 percent. Historically, Galaxy has experienced bad debt losses equal to 1 percent of sales. Galaxy also provides a 24 month unlimited warranty on all new motorcycles. In the past, warranty expense has averaged 3 percent of sales. Ignoring taxes, how does the recognition of bad debt expense and warranty expense at the time of sale affect Galaxy’s liabilities? Bad debt expense, Warranty expense A) No effect, No effect B) Increase, Increase C) Increase, No effect D) No effect, Increase
A they are both realized when incurred, I believe, could be wrong tough
Affect Liabilities? they dont affect liabilities, bad debt and warranty expense are contra accounts against receivables. Answer is A.
Bad debt and warranty expense creates DTAs, have an effect only when actually incurring. I would also say A. Income tax expense would be lower.
The correct answer was D) No effect Increase The recognition of bad debt expense has no effect on liabilities, current revenues are reduced by the expected amount of uncollectable accounts. Bad debt expense reduces net income and reduces assets. The recognition of expected warranty expense decreases net income (following the matching principle), and since it is not currently paid (doesn’t reduce assets) it creates or increases a liability at the time of sale.
wicked:)) that’s the type of questions I love to see here:)) Now that I think of it, warranty expense is a future liability (heck, it took me almost 2 months to get my laptop back from bestbuy/geeksquad, but it was their liability to repair it). But when, and if occuring, it increases liabilities. Bad debt expense is a reduction of accounts receivables, so it produces no further liabilities to the seller.
map1 Wrote: ------------------------------------------------------- > > Now that I think of it, warranty expense is a > future liability (heck, it took me almost 2 months > to get my laptop back from bestbuy/geeksquad, but > it was their liability to repair it). But when, > and if occuring, it increases liabilities. --------------------------------------- map, when occuring, it won’t increase liabilities. but decrease asset due to actual expense. and I guess the liabilities decreases too, because one of liabilities gone.
bad debt expense never affects liabilities.
Is bad debt expense just a reduction in (1) account receivable and (2) allowance for bad debt? Also, is there no contra account for warranty expense? How is that accounted for?
the initial entry for bad debt expense would be a debit to bad debt expense and credit to allowance for doubtful accounts (negative asset). this is done at the beginning of the year. the contra account afda is adjusted for actual write offs at the end of the year. when warranty expense is accrued for, you have a debit to warranty expense and credit to warranties payable (debt).
Took me a while but I am guessing A. Since expense was incurred at the beginning, you are oweing nothing. In fact, you have prepaid warranty expense which is an asset.