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Warranties
Most of the products sold by companies come with some type of warranty. A warranty is a guarantee that the manufacturer of the product will repair or replace the product for a certain period of time.
Accounting for Warranties
- Liability is created when a product is sold with a warranty, calledWarranty liability
- Also called Warranty payable or Warranty provision.
- Warranty liability is adjusted periodically usingWarranty expenseaccount.
- Warranty liability is "paid" when a product under warranty is repaired or replaced.
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Example: Warranties
During November 2020, ABC Inc. sold 5,000 units to customers for $100 each. The company guarantees their products for 1 year and estimates that 4% of all units sold will be returned under warranty. The cost of replacing or repairing a defective unit is $20 and in November $3,000 in cash and $500 of inventory was used to repair and replace products returned under warranty.
Prepare the necessary journal entries to record the returns under warranty as well as the estimate of future warranty returns.
Journal entry to record the returns under warranty
Journal entry to record the estimate of future warranty returns
Practice: Warranties
On August 1st, 2020 the balance of Aramco's warranty provision account was $23,000. During the month the company spent $43,000 in cash repairing products returned under warranty, and on August 31st 2020 the balance of the provision was $42,500. What is the amount of warranty expense recorded on August 31st?
Practice: Warranties
Razor Sharp Air services and cleans commercial ventilations systems. The company offers a one year warranty on all of its services and estimates that warranties will amount to 3% of revenues.
Prepare the journal entries to record the following transactions
The company provides service to 27 clients during the month of November, the average price per service charged to each customer was $1,200.
Transactions:
| Account | Debit | Credit |
|---|---|---|