A company sold $12,000 worth of bicycles with an extended warranty.The company's experience is that warranty expense averages 2% of sales.The current period's entry to record the warranty expense is:

A) Debit Warranty Expense $240; credit Cash $240.
B) Debit Prepaid Warranties $240; credit Warranty Expense $240.
C) Debit Estimated Warranty Liability $240; credit Cash $240.
D) Debit Sales Allowances $240; credit Estimated Warranty Liability $240.
E) Debit Warranty Expense $240; credit Estimated Warranty Liability $240.

The entry to record the warranty expense is to debit Warranty Expense for 2% of sales, which is $240 ($12,000 x 2%). The credit should go to Estimated Warranty Liability, which is a liability account that represents the company's estimated future costs of servicing warranties. This entry correctly reflects the matching principle, which requires expenses to be recorded in the same accounting period as the related revenues. The other options are incorrect because they do not account for the estimated warranty liability.