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    Jerryca Cabaddu
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    The accrual approach matches warranty costs with revenue by accruing estimated warranty costs as an expense when products are sold. When actual costs are incurred, the estimated liability account is reduced. Differences between estimates and actuals are added or subtracted from warranty expense. The expense as incurred approach only expenses warranty costs when actually paid. Extended warranties sold separately are recorded as deferred revenue that is recognized over the warranty period proportionate to expected costs.

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    The accrual approach matches warranty costs with revenue by accruing estimated warranty costs as an expense when products are sold. When actual costs are incurred, the estimated liability account is reduced. Differences between estimates and actuals are added or subtracted from warranty expense. The expense as incurred approach only expenses warranty costs when actually paid. Extended warranties sold separately are recorded as deferred revenue that is recognized over the warranty period proportionate to expected costs.

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    4 views2 pages

    Warranty-WPS Office

    Uploaded by

    Jerryca Cabaddu
    The accrual approach matches warranty costs with revenue by accruing estimated warranty costs as an expense when products are sold. When actual costs are incurred, the estimated liability account is reduced. Differences between estimates and actuals are added or subtracted from warranty expense. The expense as incurred approach only expenses warranty costs when actually paid. Extended warranties sold separately are recorded as deferred revenue that is recognized over the warranty period proportionate to expected costs.

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    © All Rights Reserved
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    of 2

    Warranty

    Accrual Approach

     Has the soundest theoretical support. It matches cost with revenue.


     Under this approach, est. warranty cost is accrued and recorded as an expense and est. liab.
    Warranty Expense XX
    Est. warranty Liab XX
    When actual warranty cost is subsequently incurred and paid, the entry is:
    Est. warranty Liability XX
    Cash XX
     If actual warranty cost exceeds the estimate, the diferrence is charged to warranty expense.
    (added)
     If less than the estimate,the diferrence is an adjustment to warranty expese (subtracted)

    Illustration:

    Sold 1000 units for 9,000 each

    Ave. warranty cost- 500 per unit; 60% est warranty redemption

    Actual cost 180,000

    Expense as incurred approach

     approach of expensing warranty cost only when actually incurred.

    Illustration

    An entity sels ref that carry a two-year warranty against defects. the sales and warranty are made evenly
    throghout the year.

    Based on past experience, the entity pojects an estimated warranty cost as a percentage of sales.

    1st year of warranty 4%

    2nd year of warranty 10%


    Sale of warranty

     Sometimes sold separately from product sold.


     amount received from extended warranty is recognized initially as deferred revenue and
    subsequently amortized using staraight line method over the life of the warranty contract.
     Howecer, if cost are expected to be incurred in performing services under the extended
    warranty contract, revenue is recognized in proportion to the costs to be incurred annualy.

    Illustration:

    An entity sold a product for 3,000,000. the regular warranty for the product is two years. the entity sold
    an additional warranty of two years for 60,000.

    he sale is recorded as

    Cash 3,060,000

    Sale 3,000,000

    Unearned warranty revenue 60,000

    It only starts after the expiration of the regular warranty

    if it is incurred evenly:

    unearned warranty revenue 30,000

    Warranty Revenue 30,000

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