The cost of a product warranty should be included as an expense in the _____.

The cost of a product warranty should be included as an expense in the _____.

a. future period when the product is repaired or replaced

b. period of the sale of the product period

c. the cash is collected for a product sold on account

d. future period when the cost of repairing the product is paid

Answer: b. period of the sale of the product period

The amount spent on a product warranty should be understood as an expense that belongs to the period of the sale of the product. This practice stems from the matching concept in accounting, which holds that expenses should be reported in the same period as the related revenues are generated. If a firm takes a warranty on a product, it has an estimated liability for having to work on the product at some later date as may be required. Indeed, the specific cost related to the sale of the product should also refer to the cost of fulfilling the warranty, and therefore, the estimated cost of warranty should be reported as an expense at the same period as the product sale revenue. That way all the costs incurred in the course of selling goods are well captured under the general heading of cost of sales, making the true figures of the company’s revenues for that period to be well captured.