WARRANTIES PAYABLE Warranty Liability, End

 Guarantee over the product sold for period of time 1,000,000 2,500,000
 Generally applies to a product like Home Appliances

If the Product is Proven Defective: 1,500,000

 Free repair service
 Replace the product
Note: a Warranty Liability is uncertain in timing and
amount -> make provision at the point of sale [Estimate]

Entry:
1. Warranty Expense xxx
Warranty Liability xxx
[Estimate only]
2. Subsequently incurred and paid
Warranty Liability xxx
Cash xxx
3. Change in Estimate (prospectively)
a. Actual Cost > Estimate
Warranty Expense xxx
Warranty Liability xxx

b. Actual Cost < Estimate

Warranty Liability xxx
Warranty Expense xxx

ILLUSTRATION PROBLEM

AWP sold 10,000 units of computers for P20,000 each.

Each computer is under warranty for one year. During
the year, AWP incurs P1,000,000 repairs cost.

AWP expects that only 50% of the computer units sold

will be returned for repair and based from past
experience, the warranty cost will probably average
P500 per unit.

Journal Entries:

1. To record the sales:

[10,000 x 20,000 = 200,000,000]
Cash 200,000,000
Sales 200,000,000

2. Warranty liability provision:

[10,000 x 50% x 500 = 2,500,000]
Warranty Expense 2,500,000
Warranty Liability 2,500,000

3. To record the payment of the actual cost:

Warranty Liability 1,000,000
Cash 1,000,000