A company sold $12,000 worth of trampolines with an extended warranty. It estimates that 2% of these sales will result in warranty work. The company should:
A) Consider the warranty expense a remote liability since the rate is only 2%.
B) Recognize warranty expense at the time the warranty work is performed.
C) Recognize warranty expense and liability in the year of the sale.
D) Consider the warranty expense a contingent liability.
E) Recognize warranty liability when the company purchases the trampolines.

Question

Quizplus · Accepted Answer

The company should recognize warranty expense and liability in the year of the sale since it sold trampolines with an extended warranty. This matches with the matching principle of accounting that expenses should be recognized in the same period as the corresponding revenue. The fact that the rate is only 2% does not make it a remote liability, and the warranty expense should not be recognized only when the warranty work is performed. Since the warranty is already sold with the trampolines, it is not a contingent liability that should be disclosed in the notes to the financial statements. The company should not recognize warranty liability when it purchases the trampolines since the warranty is sold separately.

A Company Sold $12,000 Worth of Trampolines with an Extended