The Furman Company sells products, with a warranty if they break within two years. It should record an expense for the warranty costs:
A) After two years are up, once it knows the full costs
B) As items break and it incurs costs
C) At the time of sale, based on its estimate of what the warranty costs will be
D) Either as items break or after two years are up are acceptable alternatives under GAAP

Question

Quizplus · Accepted Answer

Under the matching principle, expenses should be recognized in the same period as the related revenues. Since the warranty is offered at the time of sale and is a cost of the product, it should be estimated and recorded as an expense at the time of sale based on the company's historical experience with warranty claims. This is in accordance with GAAP. Option A is incorrect because the company should record these costs in the same period as the sale. Option B is incorrect because not all products sold under warranty will break, and the company cannot accrue for the potential costs until they are known. Option D is incorrect because GAAP requires expenses to be recognized in the same period as the related revenue, which in this case is at the time of sale.

The Furman Company Sells Products, with a Warranty If They