WARRANTY LIAB.

WARRANTY LIAB.

1. RECOGNITION

   • Liability

2. PAST EVENT

   • Sale >> CONSTRUCTIVE OBLIGATION
     • Constructive Obligation:  Accepting certain responsibilities 

3. PROBABLE OUTFLOW RESOURCES

   • Claims against the warranty

4. RELIABLE ESTIMATE

   • GR: No reliable estimate, no warranty liability is recognized

5. RECORDING

   • a. Accrual Approach
     • has the soundest theoretical support because it properly matches cost with revenue
     • 1. Estimate: Reasonableness and accuracy Dr: Warranty Expense Cr: Estimated warranty Liability
       • Estimated warranty cost
       • 2. Actual Cost: Validation Dr: Estimated warrany Liability Cr: Cash
         • when actual cost is subsequently incurred and paid, the entry is: 
       • DIFFERENCE: Change in Estimate TREATMENT: Currently or prospectively
         • SITUATION 1: AC>Estimate Dr: Warranty Expense Cr: Estimated warranty Liability
           • SITUATION 2: AC<Estimate Dr: Estimated warranty Liability Cr: Warranty Expense
   • b. Expense as incurred Approach
     • is the approach of expensing warranty cost only when actually incurred&nbsp; Basis: Expediency&nbsp; (not very substantial or the&nbsp; period is relatively short)&nbsp;