Axe Furniture and Accessories Inc. sold an oak custom-designed harvest table for $4,000 on July 31, 2018. The wood, labor, and overhead costs of $1,200 were incurred during the three months leading up to the sale (May, June, and July). Under the expense recognition principle, which of the following statements would be true?
A) The costs of $1,200 should be expensed as cost of goods sold in the month of July under the concept of matching costs with related revenue in the period the revenue occurred.
B) The costs of $1,200 should be systematically recognized by spreading the costs as cost of goods sold over the three months that the production of the table took place.
C) The cost of the table should not be recognized as an expense as it is an asset called merchandise inventory and therefore it is a point-in-time element.
D) The cost of the table should be recognized as cost of goods sold in the earliest period in which the company knew that the table would eventually be sold and, in this case, that would be in May.

Question

Quizplus · Accepted Answer

The expense recognition principle, also known as the matching principle, requires that expenses be matched with the revenues they help to generate. Therefore, the costs of $1,200 should be expensed as cost of goods sold in July, the month when the revenue from the sale of the table was recognized.