Asked by Richard Sullivan on May 12, 2024
Verified
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:
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.
Warranty Expense
The estimated cost related to the future servicing of products sold that is recognized as an expense by a company.
Extended Warranty
An extended warranty is an additional warranty covering the repair and maintenance of items beyond the standard warranty period, usually at an extra cost.
- Log expenses related to warranties and discern their influence on financial reports.
Verified Answer
GS
Gessica SementilliMay 17, 2024
Final Answer :
C
Explanation :
According to the information given, the company's experience is that warranty expense averages 2% of sales. As $12,000 worth of bicycles were sold with an extended warranty, the company should recognize the warranty expense and liability in the year of the sale. Therefore, option C is the best choice. Option A is incorrect as 2% is not a remote liability. Option B is not feasible as warranty work may be performed after the sale. Option D is incorrect as the warranty expense is not a contingent liability but a probable expense. Option E is incorrect as the warranty liability is not recognized when the company purchases the bicycles but when the sale is made with warranty.
Learning Objectives
- Log expenses related to warranties and discern their influence on financial reports.
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