WARRANTY LIABILITY

Chapter 3
RECOGNITION OF WARRANTY
PROVISION
 The entity has a present obligation, legal or
constructive, as a result of a past event.
 It is probable that an outflow of resources embodying
economic benefits would be required to settle the
obligation.
 The amount of the obligation can be measured reliably.

*Where no reliable estimate can be made, no warranty liability is

recognized.
ACCOUNTING FOR WARRANTY
ACCRUAL APPROACH
Warranty Expense xx
Estimated Warranty Liability xx
to record estimated warranty cost

Estimated Warranty Liability xx

Cash xx
to record actual warranty cost incurred and paid

*Any difference between estimate and actual cost is a change in accounting estimate
and therefore treated currently and prospectively, if necessary.

**If the warranty runs over a period more than one year, a portion of the estimated
warranty liability shall be reported as current liability and the remaining portion as
noncurrent liability.
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.

 However, if costs are expected to be incurred in performing services

under the extended warranty contract, revenue is recognized in
proportion to the costs to be incurred annually.
PROBLEM 3 – 1
Requirement 1 - Expense as Incurred Approach
2017
1. Cash 4,500,000.00
Sales 4,500,000.00

2. Waranty Expense 40,000.00

Cash 40,000.00

2018
1. Cash 7,500,000.00
Sales 7,500,000.00

2. Warranty Expense 150,000.00

PROBLEM 3 – 1
Requirement 2 - Accrual Approach
2017
1. Cash (300x15,000) 4,500,000.00
Sales 4,500,000.00

2. Warranty Expense 144,000.00

Estimated Warranty Liability 144,000.00
(60% x 300 = 180 x 800)

3. Estimated Warranty Liability 40,000.00

Cash 40,000.00

2018
1. Cash (500 x 15,000) 7,500,000.00
Sales 7,500,000.00

2. Warranty Expense 240,000.00

Estimated Warranty Liability 240,000.00
(60% x 500 = 300 x 800)

3. Estimated Warranty Liability 150,000.00

Cash 150,000.00
PROBLEM 3 - 1
Requirement 3
Warranty Expense:
2017 144,000
2018 240,000 384,000

Actual Warranty Payments

2017 40,000
2018 150,000 190,000
Estimated Warranty Liability 12/31/2018 194,000
PROBLEM 3 – 1
REQUIREMENT 4
Warranty expense related to 2017 sales
2017
First Contract year of 1/1/2017 sales (150 x 20% x P800) 24,000.00
First Contract year of 7/1/2017 sales (150 x 20% x P800 x 6/12) 12,000.00

2018
First Contract year of 7/1/2017 sales (150 x 20% x P800 x 6/12) 12,000.00
Second Contract year 1/1/2017 sales (150 x 40% x P800) 48,000.00
Second Contract year 7/1/2017 sales (150 x 40% x P800 x 6/12) 24,000.00

2019
Second Contract year 7/1/2017 sales (150 x 40% x P800 x 6/12) 24,000.00
Warranty Expense for 2017 144,000.00
PROBLEM 3 – 1
REQUIREMENT 4
Warranty expense related to 2018 sales
2018
First Contract year of 1/1/2018 sales (250 x 20% x P800) 40,000.00
First Contract year of 7/1/2018 sales (250 x 20% x P800 x 6/12) 20,000.00

2019
First Contract year of 7/1/2018 sales (250 x 20% x P800 x 6/12) 20,000.00
Second Contract year 1/1/2018 sales (250 x 40% x P800) 80,000.00
Second Contract year 7/1/2018 sales (250 x 40% x P800 x 6/12) 40,000.00

2020
Second Contract year 7/1/2018 sales (250 x 40% x P800 x 6/12) 40,000.00
Warranty Expense for 2017 240,000.00
PROBLEM 3 – 1
REQUIREMENT 5
2017 Sales still under warranty after 12/31/2018:
Second contract year of 7/1/2017 24,000.00

2018 Sales still under warranty after 12/31/2018:

First Contract year of 7/1/2018 sales 20,000.00
Second Contract year of 1/1/2018 sales 80,000.00
Second Contract year of 7/1/2018 sales (40,000+40,000) 80,000.00
Estimated warranty liability - 12/21/2018 204,000.00
Estimated warranty liability per book 194,000.00
Increase in warranty liability 10,000.00

Warranty Expense 10,000.00

Estimated Warranty Liability 10,000.00
PROBLEM 3 – 2
EXPENSE APPROACH
2017
1 Cash 5,000,000.00
Sales 5,000,000.00

2 Warranty Expense 200,000.00

Cash 200,000.00

2018
1 Cash 9,000,000.00
Sales 9,000,000.00

2 Warranty Expense 560,000.00

Cash 560,000.00
PROBLEM 3 – 2
ACCRUAL APPROACH
2017
1 Cash 5,000,000.00
Sales 5,000,000.00

2 Warranty Expense 700,000.00

Estimated Warranty Liability (14% x 5M) 700,000.00

3 Estimated Warranty Liability 200,000.00

Cash 200,000.00

2018
1 Cash 9,000,000.00
Sales 9,000,000.00

2 Warranty Expense 1,260,000.00

Estimated Warranty Liability ( 14% x 9M) 1,260,000.00

3 Estimated Warranty Liability 560,000.00

Cash 560,000.00
PROBLEM 3 – 2
Requirement 3
Warranty Expense:
2017 700,000
2018 1,260,000 1,960,000

Actual Warranty Payments

2017 200,000
2018 560,000 760,000
Estimated Warranty Liability 12/31/2018 1,200,000
PROBLEM 3 – 2
REQUIREMENT 4
Warranty expense related to 2017 sales
2017
First Contract year of 1/1/2017 sales (2,500,000 x 4%) 100,000.00
First Contract year of 7/1/2017 sales (2,500,000 x 4% x 6/12)) 50,000.00

2018
First Contract year of 7/1/2017 sales (2,500,000 x 4% x 6/12) 50,000.00
Second Contract year 1/1/2017 sales (2,500,000 x 10%) 250,000.00
Second Contract year 7/1/2017 sales (2,500,000 x 10% x 6/12) 125,000.00

2019
Second Contract year 7/1/2017 sales (2,500,000 x 10% x 6/12) 125,000.00
Warranty Expense for 2017 700,000.00
PROBLEM 3 – 2
REQUIREMENT 4
Warranty expense related to 2018 sales
2018
First Contract year of 1/1/2018 sales (4,500,000 x 4%) 180,000.00
First Contract year of 7/1/2018 sales (4,500,000 x 4% x 6/12) 90,000.00

2019
First Contract year of 7/1/2018 sales (4,500,000 x 4% x 6/12) 90,000.00
Second Contract year 1/1/2018 sales (4,500,000 x 10%) 450,000.00
Second Contract year 7/1/2018 sales (4,500,000 x 10% x 6/12) 225,000.00

2020
Second Contract year 7/1/2018 sales (4,500,000 x 10% x 6/12) 225,000.00
Warranty Expense for 2018 1,260,000.00
 PROBLEM 3 – 2
REQUIREMENT 5
2017 Sales still under warranty after 12/31/2018:
Second contract year of 7/1/2017 125,000.00

2018 Sales still under warranty after 12/31/2018:

First Contract year of 7/1/2018 sales 90,000.00
Second Contract year of 1/1/2018 sales 450,000.00
Second Contract year of 7/1/2018 sales (40,000+40,000) 450,000.00
Estimated warranty liability - 12/31/2018 1,115,000.00
Estimated warranty liability per book 1,200,000.00
Decrease in warranty liability (85,000.00)

Estimated Warranty Liability 85,000.00

Warranty Expense 85,000.00
PROBLEM 3 – 3
ACCRUAL APPROACH
2017
1 Cash 5,000,000.00
Sales 5,000,000.00

2 Warranty Expense 600,000.00

Estimated Warranty Liability (5,000,000 x 12%) 600,000.00

1 Estimated Warranty Liability 100,000.00

Cash 100,000.00
2018
1 Cash 7,000,000.00
Sales 7,000,000.00

2 Warranty Expense 840,000.00

Estimated Warranty Liability ( 7M x 12%) 840,000.00

3 Estimated Warranty Liability 250,000.00

Cash 250,000.00
PROBLEM 3 – 3
REQUIREMENT 2

Warranty Expense for 2017 and 2018 (600,000 + 840,000) 1,440,000.00

Actual Warranty Repairs (100,000 +250,000) 350,000.00
Estimated Warranty Liability - 12/31/2018 1,090,000.00
PROBLEM 3 – 3
REQUIREMENT 2
Warranty expense related to 2017 sales
2017
First Contract year of 1/1/2017 sales (2,500,000 x 3%) 75,000.00
First Contract year of 7/1/2017 sales (2,500,000 x 3% x 6/12)) 37,500.00

2018
First Contract year of 7/1/2017 sales (2,500,000 x 3% x 6/12) 37,500.00
Second Contract year 1/1/2017 sales (2,500,000 x 9%) 225,000.00
Second Contract year 7/1/2017 sales (2,500,000 x 9% x 6/12) 112,500.00

2019
Second Contract year 7/1/2017 sales (2,500,000 x 9% x 6/12) 112,500.00
Warranty Expense for 2017 600,000.00
PROBLEM 3 – 3
REQUIREMENT 2
Warranty expense related to 2018 sales
2018
First Contract year of 1/1/2018 sales (3,500,000 x 3%) 105,000.00
First Contract year of 7/1/2018 sales (3,500,000 x 3% x 6/12) 52,500.00

2019
First Contract year of 7/1/2018 sales (3,500,000 x 3% x 6/12) 52,500.00
Second Contract year 1/1/2018 sales (3,500,000 x 9%) 315,000.00
Second Contract year 7/1/2018 sales (3,500,000 x 9% x 6/12) 157,500.00

2020
Second Contract year 7/1/2018 sales (3,500,000 x .09% x 6/12) 157,500.00
Warranty Expense for 2018 840,000.00
 PROBLEM 3 – 3
REQUIREMENT 2
2017 Sales still under warranty after 12/31/2018:
Second contract year of 7/1/2017 112,500.00

2018 Sales still under warranty after 12/31/2018:

First Contract year of 7/1/2018 sales 52,500.00
Second Contract year of 1/1/2018 sales 315,000.00
Second Contract year of 7/1/2018 sales (40,000+40,000) 315,000.00
Estimated warranty liability - 12/31/2018 795,000.00
Estimated warranty liability per book 1,090,000.00
Decrease in warranty liability -295,000.00

Estimated Warranty Liability 295,000.00

Warranty Expense 295,000.00
PROBLEM 3 – 4
REQUIREMENT 1
2016
1 Cash 9,000,000.00
Sales 9,000,000.00

2 Warranty Expense 450,000.00

Estimated Warranty Liability (1000 x 450) 450,000.00

2017
1 Cash 8,325,000.00
Sales 8,325,000.00

2 Warranty Expense 405,000.00

Estimated Warranty Liability ( 900 x 450) 405,000.00

3 Estimated Warranty Liability 180,000.00

Cash 180,000.00

2018
1 Estimated Warranty Liability (280,000 +190,000) 470,000.00
Cash 470,000.00
PROBLEM 3 – 4
REQUIREMENT 2
Warranty expense related to 2016 sales
2017
First Contract year of 1/1/2016 sales (450,000 x 40%) 180,000.00

2018
Second Contract year 1/1/2017 sales (450,000 x 60%) 270,000.00
Warranty Expense for 2017 450,000.00

Warranty expense related to 2017 sales

2017
First Contract year of 1/1/2017 sales (405,000 x 40%) 162,000.00

2018
Second Contract year 1/1/2017 sales (405,000 x 60%) 243,000.00
Warranty Expense for 2017 405,000.00

*1,000 u x P450 450,000.00

**900 u x P450 405,000.00
PROBLEM 3 – 4
REQUIREMENT 2
2017 Sales still under warranty after 12/31/2018:
Second Contract year of 12/31/2018 sales 243,000.00
Estimated warranty liability - 12/31/2018 243,000.00
Estimated warranty liability per book 205,000.00
Increase in warranty liability 38,000.00

Warranty Expense 38,000.00

Estimated Warranty Liability 38,000.00