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  • Chap 3 Warranty Liability Fin Acct 2 - Barter Summary Team

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    Abigail Tumabao
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    A warranty liability account records the estimated future costs of repairs or replacements for products already sold or services already provided. There are two approaches to accounting for warranty costs - the accrual approach and the expense approach. The accrual approach estimates future warranty costs and records them upfront, adjusting the estimate later based on actual costs. The expense approach only records warranty costs when incurred. Sample problems demonstrate calculating estimated warranty expenses based on past experience and sales, and adjusting the warranty liability account balance based on actual warranty payments.

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    Reviewer on Warranty Liability

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    Chap 3 Warranty Liability Fin Acct 2- Barter Summary Team

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    A warranty liability account records the estimated future costs of repairs or replacements for products already sold or services already provided. There are two approaches to accounting for warranty costs - the accrual approach and the expense approach. The accrual approach estimates future warranty costs and records them upfront, adjusting the estimate later based on actual costs. The expense approach only records warranty costs when incurred. Sample problems demonstrate calculating estimated warranty expenses based on past experience and sales, and adjusting the warranty liability account balance based on actual warranty payments.

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    394 views2 pages

    Chap 3 Warranty Liability Fin Acct 2 - Barter Summary Team

    Uploaded by

    Abigail Tumabao
    A warranty liability account records the estimated future costs of repairs or replacements for products already sold or services already provided. There are two approaches to accounting for warranty costs - the accrual approach and the expense approach. The accrual approach estimates future warranty costs and records them upfront, adjusting the estimate later based on actual costs. The expense approach only records warranty costs when incurred. Sample problems demonstrate calculating estimated warranty expenses based on past experience and sales, and adjusting the warranty liability account balance based on actual warranty payments.

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    of 2

    WARRANTY LIABILITY

    A warranty liability is a liability account in which a company records the amount of the repair
    or replacement cost that it expects to incur for products already shipped or services already
    provided.

    Recognition of warranty provision (PAS 37 par 14)


    a) The entity has a present obligation, legal or constructive as a result of a past event
    b) It is probable that an outflow of resources embodying economic benefits would be
    require to settle the obligation
    c) The amount of the obligation can be measured reliably

    2 Approaches for accounting for warranty


    1. Accrual
    2. Expense

    Journal Entries for Accrual Approach

    1.) Recording of estimated warranty cost

    Warranty expense xx
    Estimated warranty liability xx

    2.) When actual warranty cost is incurred and paid

    Estimated warranty liability xx


    Cash xx

    3.) If actual cost exceeds the estimate

    Warranty expense xx
    Estimated warranty liability xx

    4.) If actual cost is less than the estimate

    Estimated warranty liability xx


    Warranty expense xx

    Journal Entries for Expense Approach


    - Expensing warranty cost only when incurred

    1.) Recording of estimated warranty cost

    Warranty expense xx
    Estimated warranty liability xx

    2.) To record actual warranty repairs

    Estimated warranty liability xx


    Cash xx
    SAMPLE PROBLEMS

    Philips Co. sells televisions with a 2-year warranty. Past experience indicates that 2% of
    the units sold will be returned during the warranty period for repairs. The average cost of
    repairs under warranty is estimated to be P100 per unit. During 2019, 6,000 units were
    sold at an average price of P4000. During the year, repairs were made on 35 units at a
    cost of P20,000. Compute the amount of warranty expense.

    a. 12,000
    b. 14,000
    c. 18,000

    ANS: A
    Estimated Warranty Liability 20,000
    Repair Parts/Wages Payable 20,000
    (To record cost of honoring 35 warranties)

    Warranty Expense 6,000


    Estimated Warranty Liability 6,000
    (To accrue estimated warranty costs on 120 warranty contracts)
    Number of units sold 6,000
    Estimated rate of defective units × 2%
    Total estimated defective units 120
    Average warranty repair costs P 100
    Estimated Warranty Expense P12,000

    HUWAWA Co. estimated the annual warranty expense at 2% of annual net sales. The net
    sales for 2019 amounted to P10,000,000. On January 1, 2019, the warranty liability was
    P150,00 and the warranty payments during 2019 totaled P120,000

    1. What is the warranty expense for 2019?


    a) 350,000
    b) 200,000
    c) 500,000
    d) 600,000

    2. What is the warranty liability on December 31, 2019?


    a.) 150,000
    b.) 170,000
    c.) 230,000
    d.) 350,000

    Answers:
    1. B
    Warranty expense for 2019 10,000,000 x 2%= 200,000

    2. C
    Warranty Liability January 1, 2019 P150,000
    Warranty Expense for 2019 200,000
    Total P350,000
    Warranty Payments during 2019 (120,000)
    Warranty Liability Dec. 31, 2019 P230,000

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