Question

What are the two types of warranties? Explain the accounting for each type.

Short answer

There are two types of warranties:

• Assurance-type warranty.
• Service-type warranty.

Step-by-step solution

Meaning of Warranty

Warranty is a type of assurance given by a manufacturer or other third party to a product based on certain conditions. It also refers to the conditions and circumstances under which the product will be repaired or exchanged if it does not work as claimed or intended

Types of warranties and accounting for each

The following are the two types of warranties:

(a) Assurance-type warranty: At the time of sale, the product is warranted to satisfy the contract's agreed-upon specifications. This sort of guarantee is sometimes referred to as an assurance-type warranty since it is included in the purchase price of a company's goods.

(b) Service-type warranty: Warranties beyond the assurance-type guarantee and include extra services. This guarantee is referred to as a service-type warranty because it is not included in the product's purchase price. As a result, it is recorded separately as a performance obligation.