![]() Record the amount of warranty expense that the company should record for 2013. In 2013, the company sold 25,000 water bottles. When this occurs the company replaces the water bottle. Based on five years worth of data, the company estimates that 3% of the water bottles sold will be returned because of a defect. Each water bottle includes a one-year warranty against manufacturing defects. Hydration-on-the-Go makes stylish water bottles. Let’s look at an example to see how a company would estimate and record warranty expense. Units needing repair or replacement X cost per unit to repair or replace Next, calculate the cost of repair or replacement for those units: Total number of units sold X Percentage of units that are defective To calculate the warranty expense, first figure out how many products will need repair or replacement: What is the average cost of the repair or replacement under warranty?Īll of this information is readily available to managers and accounts within the company.What percentage of the products sold will need repairs or replacement based on previous experience?.How many units of the product were sold during the period of time we need to record?.In order for a company to estimate the warranty expense and liability, we need to know three things: We must estimate the expense based on previous company history and record the journal entry. Remember when we recorded Bad Debt Expense under the allowance method and had to estimate the expense at the time of the sale? Warranty expense is very similar. Accounting requires the use of many estimates. It might seem a little strange to ask a company to record an expense when it hasn’t occurred yet but we have done this many times in accounting. How does the company record an expense for a repair that has not happened yet? The expense is a cost of the sale and therefore should be matched with the revenue generated by that sale. The warranty expense occurs because the sale took place. If Weber sells a smoker in 2013 but expenses a warranty claim in 2020 (remember it is a 10-year warranty), the company is violating the matching principle. The matching principle states that a company must match revenue with expenses. When must the company record the warranty expense? That obligation generates a liability at the time the product is sold because the company has a liability that starts when the product is sold. When a company provides a warranty with its product, the company has an obligation to repair or replace the product if it is defective. It came with the product as part of the purchase.ĭo not confuse standard warranties with extended warranties that consumers purchase for an additional fee. This was not something that we purchased in addition to the product. That means that if something breaks because of a defect (not normal wear and tear or abuse), the company will replace the part that broke. ![]() It works out well for everyone! This product came with a 10-year limited warranty. In 2013, I bought my husband a Weber Smokey Mountain Cooker, because he likes to smoke meat and I like to eat smoked meat. A warranty is guarantee that the manufacturer of the product will repair or replace the product for a certain period of time. Most of the products we purchase come with some type of warranty.
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