▪ Home appliances like television sets, stereo sets,

ratio sets, refrigerators and the like are often sold

under guarantee or warranty to provide free repair
service or replacement during a specified period if
the products are defective.
▪ Such entity policy may involve significant costs on
the part of the entity if the products sold prove to be
defective in the future within the specified period of
time.
▪ PAS 37, paragraph 14, provides that a provision shall be
recognized as a liability in the financial statements under
the following conditions:
a. The entity has a present obligation, legal or
constructive, as a result of a past event (obligating
event/sale of the product).
b. It is probable that an outflow of resources
embodying economic benefits would be required to settle
the obligation.
c. The amount of the obligation can be measured
reliably (reliable estimate).
▪ There are two approaches in recording the warranty
expense, namely:
a. Accrual approach
b. Expense as incurred approach
▪ The accrual approach has the soundest theoretical
support because it properly matches cost with revenue.
▪ Following this approach, the estimated warranty cost is
recorded as follows:

▪ When actual warranty cost is subsequently incurred and

paid, the entry is:
▪ At a certain date, the estimate is reviewed to
determine its reasonableness and accuracy. The
actual warranty cost is analyzed to validate the
original estimate.
▪ Any difference between estimate and actual cost is
a change in estimate and therefore treated
currently or prospectively, if necessary.
▪ Thus if the actual cost exceeds the estimate, the
difference is charged to warranty expense as follows:

▪ If the actual cost is less than the estimate, the difference

is an adjustment to warranty expense as follows:
An entity sells 1,000 units of television sets at P9,000
each for cash. Each television set is under warranty
for one year.
The entity has estimated from past experience that
warranty cost will probably average P500 per unit
and that only 60% of the units sold will be returned
for repair.
The entity incurs P180,000 for repairs during the
year.
An entity sells 1,000 units of television sets
at P9,000 each for cash.
1. To record the sales:
An entity sells 1,000 units of television sets at P9,000 each for cash. Each
television set is under warranty for one year.
The entity has estimated from past experience that warranty cost will
probably average P500 per unit and that only 60% of the units sold will
be returned for repair.
2. To set up the estimated liability on the warranty:

Estimated sets to be returned (60% x 1,000) 600 sets

Multiply by estimated warranty cost per set 500
Estimated warranty cost
 The entity incurs for repairs during the year.

3. To record the payment of the actual cost:

 Current liability:
Estimated warranty liability P120,000

Warranty expense P300,000

The warranty cost expected to be incurred within one year
is classified as current and the balance as noncurrent.
▪ The expense as incurred approach is the approach of
expensing warranty cost only when actually incurred.
▪ This approach is justified on the basis of expediency
when warranty cost is not very substantial or when the
warranty period is relatively short.
▪ The actual warranty cost is simply recorded as:
 The entity incurs for repairs during the year.

To record the actual warranty cost:

An entity sells refrigerators that carry a 2-year warranty
against defects. The sales and warranty repairs are made
evenly throughout the year.
Based on past experience, the entity projects an estimated
warranty cost as a percentage of sales as follows:
First year of warranty 4%
Second year of warranty 10%
2020 2021
Sales 5,000,000 6,000,000
Actual warranty repairs 140,000 300,000
 2020 2021 Warranty
Sales 5,000,000 6,000,000 First year 4%
Actual warranty repairs 140,000 300,000 Second year 10%
2020
1. To record the sales:

2. To record the warranty expense:

(14% x 5,000,000)
 2020 2021
Sales 5,000,000 6,000,000
Actual warranty repairs 140,000 300,000

2020
3. To record the actual warranty repairs:
 2020 2021 Warranty
Sales 5,000,000 6,000,000 First year 4%
Actual warranty repairs 140,000 300,000 Second year 10%
2021
1. To record the sales:

2. To record the warranty expense:

(14% x 6,000,000)
 2020 2021
Sales 5,000,000 6,000,000
Actual warranty repairs 140,000 300,000

2021
3. To record the actual warranty repairs:
Warranty expense:
2020 700,000
2021 840,000 1,540,000
Actual warranty repairs:
2020 140,000
2021 300,000 440,000
Estimated warranty liability - December 31, 2021 1,100,000
On December 31, 2021, the estimated warranty liability
account may be analyzed based on the 4% and 10%
estimate to determine whether the actual warranty costs
approximate the estimate.
▪ To have an easier interpretation or understanding of sales
accruing evenly during the year, it is fair to assume that half of
the sales were made on January 1 and the other half on July 1.
▪ Thus, the first contract year under a 2-year warranty of the
sales made on January 1, 2020 will be within January 1, 2020
to December 31, 2020, and the second contract year will be
within January 1, 2021 to December 31, 2021.
▪ The first contract year under a 2-year warranty of the sales
made on July 1, 2020 will be within July 1, 2020 to June 30,
2021, and the second contract year will be within July 1, 2021
to June 30, 2022.
If sales and warranty repairs are made evenly during the
year, the warranty expense for 2020 and 2021, and the
estimated warranty liability on December 31, 2021 are
determined as follows:

2020
First contract year of January 1, 2020 sales
(2,500,000 x 4%) 100,000
First contract year of July 1, 2020 sales
(2,500,000 x 4% x 6/12) 50,000
2021
First contract year of July 1, 2020 sales
(2,500,000 x 4% x 6/12) 50,000
Second contract year of January 1, 2020 sales
(2,500,000 x 10%) 250,000
Second contract year of July 1, 2020 sales
(2,500,000 x 10% x 6/12) 125,000
2022
Second contract year of July 1, 2020 sales
(2,500,000 x 10% x 6/12) 125,000
2020
First contract year of January 1, 2020 sales 100,000
First contract year of July 1, 2020 sales 50,000
2021
First contract year of July 1, 2020 sales 50,000
Second contract year of January 1, 2020 sales 250,000
Second contract year of July 1, 2020 sales 125,000
2022
Second contract year of July 1, 2020 sales 125,000
Total warranty expense for 2020 700,000
2021
First contract year of January 1, 2021 sales
(3,000,000 x 4%) 120,000
First contract year of July 1, 2021 sales
(3,000,000 x 4% x 6/12) 60,000
2022
First contract year of July 1, 2021 sales
(3,000,000 x 4% x 6/12) 60,000
Second contract year of January 1, 2021 sales
(3,000,000 x 10%) 300,000
Second contract year of July 1, 2021 sales
(3,000,000 x 10% x 6/12) 150,000
2023
Second contract year of July 1, 2021 sales
(3,000,000 x 10% x 6/12) 150,000
2021
First contract year of January 1, 2021 sales 120,000
First contract year of July 1, 2021 sales 60,000
2022
First contract year of July 1, 2021 sales 60,000
Second contract year of January 1, 2021 sales 300,000
Second contract year of July 1, 2021 sales 150,000
2023
Second contract year of July 1, 2021 sales 150,000
Total warranty expense for 2021 840,000
 AFTER DECEMBER 31, 2021
DECEMBER 31, 2021
2020 sales still under warranty after December 31, 2021:
Second contract year of July 1, 2020 sales 125,000
2021 sales still under warranty after December 31, 2021:
First contract year of July 1, 2020 sales 60,000
Second contract year of January 1, 2020 sales 300,000
Second contract year of July 1, 2020 sales
(150,000 + 150,000) 300,000
Estimated warranty liability - December 31, 2021 785,000
Estimated warranty liability per book 1,100,000
Decrease in warranty liability (315,000)
▪ A warranty is sometimes sold separately from the product
sold.

▪ When products are sold, the customers are entitled to the

usual manufacturer’s warranty during a certain period.

▪ However, the seller may offer an “extended warranty” on the

product sold but with additional cost.

▪ In such case, the sale of the product with the usual warranty is
recorded separately from the sale of the extended warranty.
▪ The amount received from the sale of the extended warranty
is recognized initially as deferred revenue and subsequently
amortized using straight line over the life of the warranty
contract.
▪ However, if costs are expected to be incurred in performing
services under the extended warranty contract, revenue is
recognized in proportion to the costs to be incurred annually.
An entity sold a product for P3,000,000. The regular warranty
period for the product is two years. The entiy sold an additional
warranty of two years at a cost of P60,000.
The sale is recorded as follows:
The extended warranty contract starts only after the expiration
of the regular two-year warranty period.

If the costs are incurred evenly, the unearned warranty revenue

is amortized at the end of the third year as:

(60,000/2 years)
Carpet Company had a balance of P800,000 in the
warranty liability account on December 31, 2020. The
warranty expenditures totaled P2,500,000 for 2021. The
warranty expense is calculated at 6% of sales. Sales
amounted to P40,000,000 for 2021.

What was the balance in the warranty liability account

on December 31, 2021?
a. 2,400,000 b. 3,200,000 c. 700,000 d. 800,000
Mile Company sells washing machines that carry a
three-year warranty against manufacturer’s defects.
Based on entity experience, warranty costs are
estimated at P300 per machine.
During the current year, the entity sold 2,400 washing
machines and paid warranty costs of P170,000.
1. What amount should be reported as warranty
expense?
a. 170,000 b. 240,000 c. 550,000 d. 720,000
2. What is the warranty liability at year-end?
a. 550,000 b. 720,000 c. 170,000 d. 0
Bold Company estimated annual warranty expense at 2% of
annual net sales. The net sales for the current year
amounted to P4,000,000.
At the beginning of current year, the warranty liability was
P60,000 and the warranty payments during the current year
totaled P50,000.
1. What is the warranty expense for the current year?
a. 70,000 b. 50,000 c. 80,000 d. 60,000
2. What is the warranty liability at year-end?
a. 10,000 b. 70,000 c. 80,000 d. 90,000
On April 1, 2020, Ash Company began offering a new product for sale
under a one-year warranty.
Of the 50,000 units in inventory at April 1, 2020, 30,000 had been sold by
June 30, 2020.
Based on experience with similar products, the entity estimated that the
average warranty cost per unit sold would be P80.
Actual warranty costs incurred from April 1 through June 30, 2020 totaled
P700,000.
1. What is the warranty expense for 2020?
a. 2,400,000 b. 4,000,000 c. 2,000,000 d. 1,200,000
2. On June 30, 2020, what amount should be reported as estimated
warranty liability?
a. 1,600,000 b. 3,300,000 c. 1,700,000 d. 900,000
In 2020, Dubious Company began selling new line of products that carry a two-year
warranty against defects.
Based upon past experience with other products, the entity estimated warranty costs
as a percentage of peso sales.
First year of warranty 2%
Second year of warranty 5%
2020 2021
Sales 5,000,000 7,000,000
Actual warranty cost 100,000 300,000
1. What is the warranty expense for 2020?
a. 350,000 b. 100,000 c. 175,000 d. 150,000
2. What is the warranty liability on December 31, 2020?
a. 150,000 b. 250,000 c. 125,000 d. 0
3. What is the warranty expense for 2021?
a. 300,000 b. 350,000 c. 490,000 d. 140,000
4. What is the warranty liability on December 31, 2021?
a. 390,000 b. 440,000 c. 490,000 d. 840,000