Electronic City sells various electronic products. With each of its products, Electronic City offers customers the option of purchasing a repair contract. Under the contracts, Electronic City will make repairs anytime during the term of the contract. Electronic City estimates that repair costs related to this year's sales will be $39,000. During the current year, Electronic City incurs repair costs of $37,000 related to prior year's contracts and $4,000 on contracts sold this year.
I.If Electronic City accounts for the contracts using the accrual method of accounting, its repair cost deduction is $39,000.
II.If Electronic City accounts for the contracts using the cash method of accounting, its repair cost deduction is $41,000.

A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Question

Electronic City sells various electronic products. With each of its products, Electronic City offers customers the option of purchasing a repair contract. Under the contracts, Electronic City will make repairs anytime during the term of the contract. Electronic City estimates that repair costs related to this year's sales will be $39,000. During the current year, Electronic City incurs repair costs of $37,000 related to prior year's contracts and $4,000 on contracts sold this year.
I.If Electronic City accounts for the contracts using the accrual method of accounting, its repair cost deduction is $39,000.
II.If Electronic City accounts for the contracts using the cash method of accounting, its repair cost deduction is $41,000.
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A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Quizplus · Accepted Answer

If Electronic City accounts for the contracts using the accrual method of accounting, it would only deduct repair costs related to this year's sales, which is $39,000. However, if Electronic City accounts for the contracts using the cash method of accounting, it would deduct repair costs paid during the year, which would be $37,000 (related to prior year's contracts) + $4,000 (on contracts sold this year) = $41,000. Therefore, statement II is correct. Statement I is incorrect as it only considers repair costs related to this year's sales and not the repair costs paid during the year.

Electronic City Sells Various Electronic Products