Combine Company Warranty For Free

The additional warranty expense in the income statement would reduce overall net income. However, if actual warranty claims are significantly lower than estimated warranty claims (i.e. warranty claims are overstated), then that means there warranty liability is overstated.

The warranty expense occurs because the sale took place. The expense is a cost of the sale and therefore should be matched with the revenue generated by that sale.

Accrue the warranty expense with a debit to the warranty expense account and a credit to the warranty liability account. As actual warranty claims are received, debit the warranty liability account and credit the inventory account for the cost of the replacement parts and products sent to customers.

To estimate the warranty expense for a company, we need to know three main things: Number of units sold during a particular accounting period. Percentage of the sold products that will probably need a repair or a replacement based on previous experiences. Average cost of repairing or replacing products under warranty.

The expense associated with a commitment to repair or replace a product for a specified period of time. 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.

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.

Warranty obligations, lawsuits and all liabilities stay with the selling corporate shell. Customers will likely expect warranties to remain in force, particularly if the company continues to operate under the same brand name.

Warranty costs and service agreement costs are not capitalized if the warranty costs or service agreement costs are listed as separate line items on the purchase orders or invoices. Otherwise, warranty costs and service agreement costs are capitalized with the value of the asset.

To record the liability, the company would debit warranty expense and credit accrued warranty, which is a liability on the balance sheet. The purpose of this is to record the cost of the warranty in the same period that the revenue is recognized.

When a company goes out of business, its warranties and services often die with it, unless other agreements have been made. If you have unused gift cards for a closed business, bankruptcy filings will likely determine if and how they can be used or claimed.