A company sold $12,000 worth of bicycles with an extended warranty.It estimates that 2% of these sales will result in warranty work.The company should:
A)Consider the warranty expense a remote liability since the rate is only 2%.
B)Recognize warranty expense at the time the warranty work is performed.
C)Recognize warranty expense and liability in the year of the sale.
D)Consider the warranty expense a contingent liability.
E)Recognize warranty liability when the company purchases the bicycles.

Question

Quizplus · Accepted Answer

The company should recognize the warranty expense and liability in the year of the sale because it is probable that some of the sales will result in warranty work and the amount can be reasonably estimated. This is in accordance with the matching principle, which requires expenses to be recognized in the same period as the related revenues. Option A is incorrect because 2% is not a remote possibility. Option B is incorrect because it does not match the expense with the revenue in the same period. Option D is incorrect because a contingent liability is only recognized when it is uncertain whether a liability will actually arise. Option E is incorrect because warranty liability is recognized when the sales are made, not when the bicycles are purchased.

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