Volt Electronics sells equipment that includes a three-year warranty.Repairs under the warranty are performed by an independent service company under a contract with Volt.Based on prior experience,warranty costs are estimated to be $25 per item sold.Volt should recognize these warranty costs:
A)When the equipment is sold.
B)When the repairs are performed.
C)When payments are made to the service firm.

Question

Quizplus · Accepted Answer

Warranty costs should be recognized in the same period in which the related revenue is recognized. In this case, the equipment is sold with a three-year warranty, so the warranty costs should be recognized when the equipment is sold. This is consistent with the matching principle, which requires expenses to be recognized in the same period as the related revenue.

Volt Electronics Sells Equipment That Includes a Three-Year Warranty