Use of the accrual method in accounting for product warranty costs
A) is required for federal income tax purposes.
B) is frequently justified on the basis of expediency when warranty costs are immaterial.
C) finds the expense account being charged when the seller performs in compliance with the warranty.
D) represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale.

Question

Quizplus · Accepted Answer

The accrual method is the generally accepted method for accounting for warranty costs, especially when the warranty is an integral part of the sale. This method recognizes the warranty expense at the time of sale and accrues it over the warranty period based on an estimate of the expected cost of honoring warranty claims. The expense account is charged when the seller performs in compliance with the warranty, making D the correct choice. A is incorrect because the use of the accrual method is not required for federal income tax purposes, although it is permitted. B is also incorrect because the accrual method should be used even if the warranty costs are immaterial.

Use of the Accrual Method in Accounting for Product Warranty