The Furman Company Sells Products, with a Warranty If They

question 59

Multiple Choice

The Furman Company sells products, with a warranty if they break within two years. It should record an expense for the warranty costs:

• A) After two years are up, once it knows the full costs
• B) As items break and it incurs costs
• C) At the time of sale, based on its estimate of what the warranty costs will be
• D) Either as items break or after two years are up are acceptable alternatives under GAAP

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Definitions:

Short-Term Notes Receivables

Short-duration financial assets representing amounts owed to a company that must be paid within a year.

Allowance Account

An accounting practice used to create a buffer for potential future losses on receivables, also known as a provision for doubtful debts.

Gross Realizable Value

The estimated selling price of goods minus any costs associated with the completion and sale of those goods.

Promissory Note

A financial instrument where the writer promises to pay a specific sum to a specified person or bearer at a determined date.