Question

Explain the accounting for an assurance-type warranty.

Short answer

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

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.

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.