The adjusting entry required to recognize warranty expense will cause:

• A. a decrease in expenses and an increase in assets
• B. a decrease in assets and a decrease in liabilities
• C. an increase in expenses and an increase in liabilities
• D. an increase in revenues and an increase in assets

Answer: (C)

Verified step by step guidance

1. Understand the concept of warranty expense: Warranty expense is an estimated cost that a company expects to incur for repairing or replacing products under warranty. It is recognized as an expense in the period when the related sales are made, following the matching principle.
2. Identify the impact of recognizing warranty expense: When warranty expense is recorded, it increases the company's expenses, which reduces net income. At the same time, a liability account (e.g., Warranty Liability) is increased to reflect the obligation to cover future warranty claims.
3. Determine the journal entry for warranty expense: The adjusting entry typically involves debiting Warranty Expense (to increase expenses) and crediting Warranty Liability (to increase liabilities). This ensures the expense is matched with the revenue generated from the sale of the products.
4. Analyze the options provided: Evaluate each option based on the accounting impact of the adjusting entry. For example, 'an increase in expenses and an increase in liabilities' aligns with the journal entry for warranty expense recognition.
5. Conclude the correct answer: Based on the analysis, the correct impact of the adjusting entry is 'an increase in expenses and an increase in liabilities,' as this reflects the proper accounting treatment for warranty expense recognition.