a company sold $12,000 worth of bicycles with an extended warranty. the company’s experience is that…

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: multiple choice consider the warranty expense a remote liability since the rate is only 2%. recognize warranty expense at the time the warranty work is performed. recognize warranty expense and liability in the year of the sale.

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: multiple choice consider the warranty expense a remote liability since the rate is only 2%. recognize warranty expense at the time the warranty work is performed. recognize warranty expense and liability in the year of the sale.

Answer

Brief Explanations:

Under the matching - principle in accounting, warranty expenses related to sales should be recognized in the same period as the sales. Since the company has made the sales, it should recognize the warranty expense and liability in the year of the sale, even if the actual warranty work may occur later. A 2% rate does not make it a remote liability, and recognizing when the work is performed would violate the matching - principle.

Answer:

Recognize warranty expense and liability in the year of the sale.