Problem:
Northeast Products manufactures video equipment that it sells through a distributor. The distributor provides a warranty to its retailers and to the final consumers who buy the video equipment. The warranty provides that the distributor will make any repairs necessary to correct any problem with the operation of the equipment. Northeast reimburses the distributor for all warranty claims. For book purposes, Northeast records an estimated warranty liability when the equipment is sold by the distributor to its retailers. For tax purposes, Northeast deducts a warranty expense equal to its actual payments to the distributor during the last 3.5 months of the year and the first 8.5 months of the following year. Is Northeast using a proper method of accounting to compute its deduction?