Question

Because the accrued 200,000 warranty expense is an estimate (it is not a fixed and determinable liability) BCS is not allowed to deduct any of the200,000 accrual in year 0. However, BCS is allowed to deduct the 30,000 it actually spent in year 0 repairing its product under the warranty. What is the reason BCS is not allowed to deduct the200,000 accrual in year 0?

1) Because the $200,000 accrual is a fixed and determinable liability
2) Because the $200,000 accrual is an estimate
3) Because BCS did not actually spend the $200,000 in year 0
4) Because BCS is not allowed to deduct any warranty expenses in year 0

Answer 1

BCS is not allowed to deduct the $200,000 accrual in year 0 because it represents an estimate of future expenses rather than an actual incurred expense, which tax accounting principles do not allow for deduction.

Step-by-step explanation:

The reason BCS is not allowed to deduct the $200,000 accrual in year 0 is option 2: Because the $200,000 accrual is an estimate. This is related to tax accounting principles, which typically require that expenses be both incurred and economically performance has occurred before they can be deducted. In this case, although BCS has estimated future warranty expenses, it has not actually expended those amounts within the tax year in question.

Therefore, the deduction is only permissible for the amounts that have been definitely incurred and paid, such as the $30,000 it spent on actual warranty repairs in year 0.