What type of expense must be recorded when a company sells a product with a warranty?

When a company sells a product with a warranty, it must recognize a warranty expense as soon as the sale occurs. This is because the company has an obligation to repair or replace the product if a defect arises during the warranty period. The warranty expense represents the estimated cost of fulfilling this obligation, and it is accrued at the time of the sale to accurately reflect the company’s liabilities and expenses on its financial statements.

Recognizing warranty expense at the time of sale adheres to the matching principle in accounting, which requires that expenses be matched with the revenues they help to generate within the same accounting period. This ensures that financial statements provide a clear and truthful picture of a company’s financial health.

The other choices listed do not apply to the situation of selling a product with a warranty. Administrative expenses are incurred for general management and do not directly relate to a product sale; research and development expenses pertain to the development of new products or processes; and cost of goods sold is associated with the direct costs of producing the items sold, but it does not account for the potential future costs related to warranty claims. Therefore, warranty expense is the most relevant and accurate designation for the costs expected to arise from warranties linked to products sold.