Chap 3

• Warranty


  A guarantee provided by the seller of a product to repair or replace the product if it becomes defective within a specified period of time
• Home appliances with warranty

  • Television sets
  • Stereo sets
  • Radio sets
  • Refrigerators
• Warranty policy


  • Provides free repair service or replacement during a specified period if the products are defective
  • May involve significant costs on the part of the entity if the products sold prove to be defective in the future within the specified period of time
• Approaches to recording warranty expense

  • Accrual approach
  • Expense as incurred approach
• Accrual approach


  The estimated warranty cost is accrued and recorded as an expense and estimated liability
• Expense as incurred approach

  Expensing warranty cost only when actually incurred
• Expense as incurred approach


  • Justified on the basis of expediency when warranty cost is not very substantial or when the warranty period is relatively short
• Recording actual warranty cost under expense as incurred approach

  1. Debit warranty expense

  2. Credit cash
• Sale of warranty


  The seller may offer an extended warranty on the product sold but with additional cost
• Recording sale of extended warranty

  1. Amount received is recognized initially as deferred revenue

  2. Subsequently amortized using straight line over the life of the warranty contract
• Revenue recognition for extended warranty


  If costs are expected to be incurred, revenue is recognized in proportion to the costs to be incurred annually