Final answer:
The statement is true(A); a company typically records an estimated warranty expense in the year of sale and uses this reserve to cover warranty repairs in future years without recognizing additional warranty expense.
Step-by-step explanation:
The statement that a company recognized warranty expense for an item in both the year the merchandise was sold under warranty (Year 1) and the year it was returned for warranty repair (Year 2) is true(A). When a company sells merchandise with a warranty, it estimates the costs of future warranty repairs and recognizes these as an expense in the year the sale occurs, which adheres to the matching principle in accounting. This is done to match expenses with the revenues they help to generate. If the item is later returned for repairs under warranty, the company uses the warranty liability previously set aside to record the cost of the repair, but it does not recognize additional warranty expense for the repair because it was already estimated and recorded at the point of sale.