Warsaw Technologies, Inc. manufactures modems and disk drives. Warsaw’s current year’s revenues are nearly 20 percent below those of last year. As year-end approaches, the company president has instructed the accounting department not to record a December 31 adjusting entry for warranty expense on products sold during the year. ‘‘We can recognize that expense next year when we actually pay those costs. That makes more sense anyway. Why go to the trouble of estimating additional expenses at year-end? We have more than enough of the real thing.’’
Required:
Write a memo to Warsaw’s president explaining why it is necessary to recognize estimated warranty expense at the end of an accounting period. In your memo, point out How the company’s financial statements will be misleading if this expense is not recorded.