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Question 20 XYZ, Inc. sells high performance bicycles to cycle enthusiasts, and offers warrantees on the bicycles they sell to boost sales. The begin
Question 20 XYZ, Inc. sells high performance bicycles to cycle enthusiasts, and offers warrantees on the bicycles they sell to boost sales. The begin operations on 1/1/2007. In 2007 they sell $100,000 worth of bicycles, and incur $2,000 in warrantee related repairs. In 2008 they sell $200,000 worth of bicycles and incur an additional $4,000 of warrantee related repairs. They recorded the following journal entries for these repairs: 2007 Repairs Warrantee Expense $2,000 $2,000 Cash 2008 Repairs Warrantee Expense $4,000 Cash $4,000 At the beginning of 2009, XYZ, Inc. realizes that they have made a mistake in the way they account for warrantees. To be compliant with GAAP, XYZ, Inc. should have estimated warrantee costs in the period of sale and set up a warrantee liability so that the matching principle is not violated. Then, as repairs are made, they should have reduced cash and reduced the liability. To be compliant with GAAP, XYZ, Inc. decides to correct this error, and uses 5% of bicycle sales to estimate warrantee expense in 2007 and 2008. What is the required adjusting entry to adjust Retained Earnings (ignore taxes) at the beginning of 2009?
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