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Chapter 13: Question 22Q (page 691)

Explain the accounting for an assurance-type warranty.

Short Answer

Expert verified

It is accounted for as a warranty expense account debited, and the liability account is credited due at the time of the product sold. Since it is a warranty given for the functioning of the product, it does not account for the separate performance obligation. If it was purchased for a separate price with or without a warranty, then it’s considered as a separately priced extended warranty or product maintenance contract under GAAP.

Step by step solution

01

Definition of Assurance Type Warranty

Assurance type warranties are those warranties that promise to customers that the delivered product is functioning as per specifications or guides provided at the time of purchase.

02

About Assurance-type warranty

Assurance Type Warranty is the warranty that is specified in the delivered product and functionality agreement; no transaction value is specified for it.

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 replacement parts and products sent to the customers.

Example: A sells TV with a 12-month warranty which assures that it is intended to work for that 12month period. The warranty is not sold separately.

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Most popular questions from this chapter

Question: Amsterdam Company uses a periodic inventory system. For April, when the company sold 600 units, the following information is available.

Units Unit Cost Total Cost

April 1 inventory 250 \(10 \) 2,500

April 15 purchase 400 12 4,800

April 23 purchase 350 13 4,550

1,000 $11,850

Compute the April 30 inventory and the April cost of goods sold using the average-cost method.

On January 1, 2017, Roosevelt Company purchased 12% bonds, having a maturity value of \(500,000, for \)537,907.40.

The bonds provide the bondholders with a 10% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest

received January 1 of each year. Roosevelt’s business model is to hold these bonds to collect contractual cash flows.

Instructions

(a) Prepare the journal entry at the date of the bond purchase.

(b) Prepare a bond amortization schedule.

(c) Prepare the journal entry to record the interest revenue and the amortization for 2017.

(d) Prepare the journal entry to record the interest revenue and the amortization for 2018

BE13-1 (L01) Roley Corporation uses a periodic inventory system and the gross method of accounting for purchase discounts. On July 1, Roley purchased \(60,000 of inventory, terms 2/10, n/30, FOB shipping point. Roley paid freight costs of \)1,200. On July 3, Roley returned damaged goods and received credit of $6,000. On July 10, Roley paid for the goods. Prepare all necessary journal entries for Roley.

E13-5 (L01) (Adjusting Entry for Sales Tax) During the month of June, Rowling Boutique recorded cash sales of \(233,200 and credit sales of \)153,700, both of which include the 6% sales tax that must be remitted to the state by July 15.

Instructions

Prepare the adjusting entries that should be recorded to fairly present the June 30 financial statements.

Consider the bond investment by Lady Gaga in IFRS17-5. Discuss the accounting for this investment if Lady Gaga’s

Business model is to hold the investment to collect interest while outstanding and to receive the principal at maturity.
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