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 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 bicycles.

Question

Quizplus · Accepted Answer

The company should recognize the warranty expense and liability in the year of the sale because the warranty is sold at the time of the sale and it is estimated that the expense will be incurred in the future. This follows the matching principle of accounting, which requires expenses to be recognized in the same period as the revenue that they relate to. Option A is incorrect because a 2% expense rate is not considered remote. Option B is incorrect because it does not follow the matching principle. Option D is incorrect because a contingent liability is only recognized when it is possible that the liability will occur and the amount cannot be estimated reliably. Option E is incorrect because the warranty liability is not incurred at the time of purchase of the bicycles but only when the warranty is sold to the customer.

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