Classify Line Warranty For Free

Warranty expense is the cost that a business expects to or has already incurred for the repair or replacement of goods that it has sold. The total amount of warranty expense is limited by the warranty period that a business typically allows.

The costs associated with a manufacturer's product warranty are part of its selling expenses and therefore part of its SG&A expenses. If the future costs of the warranty coverage are probable and can be estimated, they are recorded at the time of the sale.

If the service is provided under an extended warranty, its costs will be classed under cost of revenue. If it's provided under a standard warranty, it will probably be classed under operating expenses (OPEX).

A warranty is a contingent liability, so the party providing it should record a liability and warranty expense when it records the associated sale of goods or services.

There are two general types of warranties, expressed and implied. Each category has different sub-types of warranties, with terms, conditions, and guarantees. Warranty terms can vary from free repairs on the defective product to complete replacement.

The expense should be reported on the income statement at the time that the sale of the product is reported in order to comply with the matching principle. A related account, Warranty Payable or Warranty Liability is also established at the time of the sale.

A warranty is a service-type warranty if the customer has the option to purchase it separately or if it provides a service to the customer beyond fixing defects existing at the time of sale. Service-type warranties would be accounted for as a separate performance obligation.

The prepaid expense must be recorded as an expense based on the term of the warranty. The company needs to debit warranty expenses and credit prepaid expenses. Warranty expense will impact the income statement by deducting profit....Solution. AccountDebitCreditPrepaid Expense Warranty1,200Cash1,200

Asset and Warranty Purchase The embedded manufacturers warranty is included as part of the cost of the asset itself and is therefore capitalized.

Use the following steps as a guide to account for warranty expenses: Find the total number of products sold.Determine the percentage of defective products.Calculate the number of products needing replacement.Evaluate the cost of product replacement.Estimate the total warranty expense.