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.
D)Evenly over the life of the warranty.

Question

Quizplus · Accepted Answer

Under accrual accounting, warranty costs should be recognized in the same period in which the related revenue is recognized. Therefore, Volt Electronics should recognize the estimated warranty costs of $25 per item sold at the time the equipment is sold. This ensures that the expenses are matched with the related revenue and accurately reflects the true cost of the sale.

Volt Electronics Sells Equipment That Includes a Three-Year Warranty