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Lesson3 - Warranty Liability

The document discusses warranty liability accounting. It defines a warranty as a provision for free repairs or replacements if products are defective within a specified period. There are two approaches to accounting for warranty costs - the accrual method, where costs are estimated and recognized over the warranty period, and the expense as incurred method, where costs are only recognized when repairs are made. The document includes several problems demonstrating how to estimate warranty liabilities based on sales and past repair data, and how to account for actual warranty repairs incurred over multiple years of a product's warranty period. It also discusses selling extended warranties separately for an additional cost.

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Cirelle Faye Silva
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2K views

Lesson3 - Warranty Liability

The document discusses warranty liability accounting. It defines a warranty as a provision for free repairs or replacements if products are defective within a specified period. There are two approaches to accounting for warranty costs - the accrual method, where costs are estimated and recognized over the warranty period, and the expense as incurred method, where costs are only recognized when repairs are made. The document includes several problems demonstrating how to estimate warranty liabilities based on sales and past repair data, and how to account for actual warranty repairs incurred over multiple years of a product's warranty period. It also discusses selling extended warranties separately for an additional cost.

Uploaded by

Cirelle Faye Silva
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Warranty Liability

Lesson 3
Technical Knowledge
● To understand the nature and purpose of warranty.

● To ascertain the recognition of an estimated warranty liability.

● To test the reasonable accuracy of an estimated warranty liability.


Definition
-> a provision of free repair services or replacement during a specified
period if the products sold are defective.
Two Approaches
ACCRUAL EXPENSE AS INCURRED
Problem 3-2. In 2021, Dare Company began selling a new calculator that carried a two-year
warranty against defects. The entity projected the estimated warranty cost as a percent of
sales. 1st yr of warranty=4% and 2nd yr of warranty=10%. Sales and actual warranty repairs
were:
Problem 3-4. Sony Company sells stereos under a 2-year warranty contract that requires the
entity to replace defective parts and provide free labor on all repairs. During 2020, 1,000 units
were sold at P9,000 each. In 2021, the entity sold an additional 900 units at P9,250 each. Sales
occurred on the last day of the year for both 2020 and 2021.
Based on past experience, the estimated 2-year warranty costs are P200 for parts and P250
for labor per unit. It is also estimated that 40% of the warranty expenditures will occur in the
first year and 60% in the second year. Actual warranty expenditures were:
Sale of warranty (separately)
-> this is an extended warranty sold separately but with additional
cost.
Problem 3-7. Anneliese Company sells televisions at an average price of
P9,000 and also offers a separate three-year warranty contract for P900 that
requires the entity to perform periodic services and replace defective parts.
During 2021, the entity sold 300 television sets and 270 extended warranty
contracts for cash. The entity estimated the three-year warranty cost as P200
for parts and P400 for labor and accounts for the sale of warranty separately.
The sale occurred on December 31, 2021. The entity recognized income from
the sale of warranty on a straight line basis. In 2022, the entity incurred actual
cost relative to the warranty of P20,000 for parts and P40,000 for labor.
Thank You!

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