Asked by Cierra Clark on May 27, 2024
Verified
Concerning accounting for warranties, which of the following statements is false?
A) The expense warranty accrual method is not an acceptable method for federal income tax purposes.
B) The modified cash basis is the most conceptually sound method for financial reporting.
C) The sales warranty accrual method uses a cost recovery approach to warranty revenue recognition.
D) The modified cash basis recognizes warranty expense when cash is paid for the repairs to merchandise under warranty.
Expense Warranty Accrual Method
An accounting practice where a company estimates the costs of warranties and records these costs as an expense when the corresponding sales are made.
Modified Cash Basis
An accounting method that combines elements of both cash and accrual accounting, recognizing revenues when they are received and expenses when they are paid, with some adjustments.
Warranty Revenue Recognition
The accounting process of recognizing revenue from warranties provided, typically over the period the warranty covers.
- Learn the ways warranties are treated in accounting according to different accounting strategies.
Verified Answer
PT
Phuong Thao HoangMay 30, 2024
Final Answer :
B
Explanation :
The modified cash basis is not the most conceptually sound method for financial reporting because it does not match expenses to revenues in the same period, which is a fundamental principle in accrual accounting. The other statements are true:
A) The expense warranty accrual method is not an acceptable method for federal income tax purposes because it violates the matching principle by recognizing expenses before they are incurred.
C) The sales warranty accrual method uses a cost recovery approach to warranty revenue recognition, which means that revenue is recognized only to the extent of the warranty costs incurred in each period.
D) The modified cash basis recognizes warranty expense when cash is paid for the repairs to merchandise under warranty, which may not match the period in which the warranty expense was actually incurred.
A) The expense warranty accrual method is not an acceptable method for federal income tax purposes because it violates the matching principle by recognizing expenses before they are incurred.
C) The sales warranty accrual method uses a cost recovery approach to warranty revenue recognition, which means that revenue is recognized only to the extent of the warranty costs incurred in each period.
D) The modified cash basis recognizes warranty expense when cash is paid for the repairs to merchandise under warranty, which may not match the period in which the warranty expense was actually incurred.
Learning Objectives
- Learn the ways warranties are treated in accounting according to different accounting strategies.