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:

Question

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The company should recognize the warranty expense and liability in the year of the sale because it is probable that the company will incur warranty costs and the amount can be reasonably estimated (2% of sales). This is in line with the matching principle of accounting. Option A is incorrect because even though 2% may seem like a small amount, it should still be recognized as an expense and liability. Option C is incorrect because the warranty expense can be reasonably estimated and is therefore not a contingent liability. Option D is incorrect because the expense should be recognized in the year of the sale, not when the work is performed. Option E is incorrect because the warranty liability is not recognized at the time of purchasing the bicycles, but rather at the time of sale.

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