According to GAAP, a company that sells cars, and gives its customers a five-year warranty, should not report any expense from these warranties until cars actually break and it has to pay for the repairs.

Question

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According to GAAP, a company that sells cars with a warranty should estimate the cost of future warranty claims and recognize that expense at the time of sale. This is known as the warranty expense accrual method. The company should record a liability for estimated future warranty claims and the corresponding warranty expense in the same accounting period as the sale.

According to GAAP, a Company That Sells Cars, and Gives