Chapter 13, Problem 13.12BYP

To determine

Warranty

Warranty is assurance provided to a customer by a seller. It is provided against the probable defects that might occur in a product. Warranty for a product is recognized at the time of sale being made. When warranties and guarantees are considered, contingent liability becomes accrued. Here, estimated warranty is a liability and is credited as there is an increase in liability. Warranty expense is debited as there is increase in the expense incurred. There are two types of warranty. They are as follows:

1. 1. Manufacturer’s warranty is the assurance given to buyer from seller at the time of purchase. It is a part of product package. On the other hand, extended warranty is the assurance given beyond the manufacturer’s original warranty.
2. 2. Extended warranty is that warranty that are sold and priced separately. These warranty are identified as separate performance obligation and thus, recorded as a separate sales transaction.

To prepare: Memo explaining handling of warranty.