Sales revenue for Booker Company for 2019 amounted to $800,000. The products sold carry a six-month warranty. Management estimates the cost of the warranty to be 3% of sales revenue. Booker should:
A)debit Warranty Expense in 2019 for $24,000.
B)debit Estimated Warranty Payable in 2019 for $24,000.
C)debit Warranty Expense when the products are repaired or replaced in either 2019 or 2020.
D)credit Estimated Warranty Payable in either 2019 or 2020 when the products are repaired or replaced.

Question

Quizplus · Accepted Answer

BAccording to the matching principle in accounting, expenses should be recognized in the period in which the related revenues are recognized. Therefore, Booker Company should recognize the warranty expense in 2019, the same year the sales were made. The estimated warranty expense ($800,000 sales * 3% = $24,000) should be debited to Warranty Expense to reflect the cost of the expected future repairs or replacements under the warranty. At the same time, Estimated Warranty Payable should be credited to recognize the liability for the future warranty claims. This approach ensures that the costs associated with the sales are matched with the revenues in the financial statements.

Sales Revenue for Booker Company for 2019 Amounted to $800,000