A product is sol with a warranty. the cost of providing a warranty may be replac

Question

A product is sol with a warranty. the cost of providing a warranty may be replacing the productor parts and labor for a repair. when and how should the company record these costs ?

a. the exact amount of the repairs and replacement should be recorded in the same period that the product is sold

b. the company cannot record any expense until it makes the reapir or replacement

c. the company must estimate the expected cost and record in the period the product is sold.

d. the company must add up all the costs for each year and then take 1/2 each month in the following year.

e. none of these

Explanation / Answer

As per the matching principle, all costs incurred for earning the revenue should be accounted in the period in which the revenue is recognised. Hence, to account for warranty costs,

the company must estimate the expected cost and record in the period the product is sold.

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