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CHAPTER 3: WARRANTY LIABILITY

Warranty Liability - 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 (PAS 37 Par. 14):
a. The entity has a present obligation as a result of 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.
Two Approaches for Accounting for Warranty:
1. Accrual = properly matches cost with revenue
Recording of estimated warranty cost
Warranty expense xx
Estimated warranty liability xx
When actual warranty cost is incurred and paid
Estimated warranty liability xx
Cash xx
If actual cost exceeds the estimate
Warranty expense xx
Estimated warranty liability xx
If actual cost is less than the estimate
Estimated warranty liability xx
Warranty expense xx
2. Expense = expensing warranty cost only when actually incurred
Recording of estimated warranty cost
Warranty expense xx
Estimated warranty liability xx
To record actual warranty repairs
Estimated warranty liability xx
Cash xx
Sale of Warranty
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.
If costs are expected to be incurred in performing services under extended warranty contract, revenue is recognized in
proportion to the costs to be incurred annually.