ACCT 110 Lecture Notes - Lecture 26: Santa Barbara City College
Document Summary
Assurance-type warranty: warranties that product meets agreed-upon specifications in the contract at the time the product is sold, is included in the sales price. This through a warranty expense and warranty liability being created. Count the full sales price as sales revenue and then create the above expenses and liabilities. Service-type warranty: provide an additional service beyond the assurance, it is not included in sales price and creates a separate performance obligation. This is through an unearned warranty revenue liability created. Don"t recognize the revenue gained and put it as unearned warranty liability. Example: you sell goods for 6,000,000 with a warranty guarantee that the product is free from any defects. The term of the assurance warranty is 2 years with an estimated cost of 30,000. You sold additional extended warranties for three years beyond the 2 years for 12,000. Hale reduces the warranty liability account over the first two years as the actual warranty costs are incurred.
