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  • Warranty Liability Actually Incurred: Total Available Warranty Cost For Products Sold

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    Czar Rabaya
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    Warranty liability is recognized when a product is sold under warranty and there is a present obligation to repair or replace defective products. There are two approaches to accounting for warranty costs - the accrual approach and expense as incurred approach. The accrual approach estimates and records warranty costs at the time of sale to match expenses with revenue, while the expense as incurred approach only records actual costs when incurred.

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    Liability

    Original Title

    V2.03.Warranty Liability

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    Warranty liability is recognized when a product is sold under warranty and there is a present obligation to repair or replace defective products. There are two approaches to accounting for warranty costs - the accrual approach and expense as incurred approach. The accrual approach estimates and records warranty costs at the time of sale to match expenses with revenue, while the expense as incurred approach only records actual costs when incurred.

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    © All Rights Reserved
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    23 views2 pages

    Warranty Liability Actually Incurred: Total Available Warranty Cost For Products Sold

    Uploaded by

    Czar Rabaya
    Warranty liability is recognized when a product is sold under warranty and there is a present obligation to repair or replace defective products. There are two approaches to accounting for warranty costs - the accrual approach and expense as incurred approach. The accrual approach estimates and records warranty costs at the time of sale to match expenses with revenue, while the expense as incurred approach only records actual costs when incurred.

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    © All Rights Reserved
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    of 2

    CHAPTER 3 current portion of EWL in the current liab and the

    non-current portion as Non-current liab.


    WARRANTY LIABILITY
    EXPENSE AS INCURRED APPROACH
    =expensing warranty cost only when
    WARRANTY
    actually incurred
    =Home appliances are often sold under
    =violates Matching Principle
    WARRANTY to provide FREE repair
    *justified on the basis of Expediency or when
    service or Replacement during a specified warranty cost is not very substantial
    period if the products are defective.
    Warranty Exp xx Record only when
    Recognition of Provision - PAS 37 P. 14 Cash xx incurred
    PROVISION shall be recognized as a
    liability in the FS under the ff conditions
    A. The entity has a PRESENT
    OBLIGATION, legal or constructive, as a
    result of a past event. TEST OF ACCURACY
    B. It is PROBABLE that an OUTFLOW of SALES MADE EVENLY
    resources embodying economic benefits (Reference: IA-Volume 2. Chapter 3. P. 73-76. 2019)

    2020=5M 2020 2021 2022 2023


    would be required to settle the obligation.
    Total Available Warranty
    C. Amount of obligation can be cost for products sold
    MEASURED RELIABLY. Yr1 2.5MX40% 100T
    *Where NO RELIABLE ESTIMATE Yr1 2.5MX40%X(6/12) 50T 50T
    can be made, NO WARRANTY Yr 2 2.5MX10% 250T
    LIABILITY is recognized. Yr 2 2.5MX10%X(6/12) 125T 125T

    2021=6M
    ACCOUNTING FOR WARRANTY Total Available Warranty
    1. ACCRUAL APPROACH cost for products sold
    2. EXPENSE AS INCURRED APPROACH Yr1 3MX40% 120T
    Yr1 3MX40%X(6/12) 60T 60T
    ACCRUAL APPROACH =it matches Cost Yr 2 3MX10% 300T
    (if silent) with Revenue Yr 2 3MX10%X(6/12) 150T 150T
    Warranty Exp xx Record EST. 635T 15
    Est. Warranty Liab xx Warranty Cost.
    Est. Warranty Liability (Adjusted) 785T
    Est. Warranty Liability (Per Book) (1100T)
    When ACTUAL Decrease in EWL (315T)
    Est Warranty Liab xx warranty cost is If:
    Cash xx subsequently Warranty Exp xx Per Book EWL < Adj.
    incurred and paid. Est. Warranty Liab xx
    EWL
    If: Est. Warranty Liab xx
    Warranty Exp xx Actual Cost > Est
    Warranty Exp xx
    >
    Per Book EWL Adj. EWL
    cost
    Est. Warranty Liab xx
    =Charge to warranty
    *Per Book should conform
    Expense
    to the Adj EWL.
    If:
    Actual Cost < Est cost
    *For Yr1 assume that half of the sales were
    Est. Warranty Liab xx
    =adjustment to sold from beginning to end of acc period while
    Warranty Exp xx
    warranty Expense the other half is sold from July of yr1 to June
    of yr2.
    SOFP *For Yr2 assume that half of the sales were
    Current Liability sold from beginning to end of acc period while
    Est Warranty Liability xx the other half is sold from July of yr2 to June
    INCOME STATEMENT of yr3
    Warranty Expense xx
    *if warranty is for more than 1 year, only report the
    SALES OF WARRANTY
    =sometimes sold SEPARATELY from the
    product sold.
    =Seller may offer an “extended warranty”
    on the product sold but with Additional
    cost.
    Amount received from the
    sale of extended warrant
    is initially recognized as
    Cash xx UNEARNED WARRANTY
    Sales xx REVENUE
    Unearned
    Warranty Rev xx
    *subsequently, it will be
    amortized using straight
    line over the life of the
    warranty contract.
    However, if costs are
    expected to be incurred
    in performing services
    Warranty Exp xx
    under the extended
    Cash xx
    warranty contract,
    revenue is recognized in
    proportion to the costs
    incurred annually.
    Amortization of
    Unearned Unearned Warranty
    Warranty Rev xx Revenue based on life of
    Warranty Rev xx warranty contract.

    WARRANTY EXPENSES - The recorded WE


    WE xx
    EWL xx
    WARRANTY EXPENDITURES - Cash paid in
    settlement of Liability
    EWL xx
    Cash xx

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