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kozerog [31]
3 years ago
12

On 1/1/27, Frankfort Company sold 100 components at $700 each. All sales were cash sales. Estimated total cost servicing the com

ponents was $1,300 each year of the three-year-warranty. Frankfort spent $1,400 servicing the components in 2027. This is considered an assurance-type warranty. Using the Expense Warranty approach, what is the 12/31/27 Warranty Liability
Business
1 answer:
DiKsa [7]3 years ago
6 0

Answer:

the 12/31/27 Warranty Liability is $2,500

Explanation:

An assurance type warranty gives a customer assurance that the Good or Service will function or work as intended.

There is no option on the customer to take the warranty or not. Therefore, an assurance type warranty is not a separate performance obligation for revenue recognition.

Assurance type warranties are accounted for in terms of IAS 37 : Provisions.

<u>Entries that Frankfort Company will have made Using the Expense Warranty approach will be :</u>

Date : 1/1/27

Debit : Warranty Expense $1,300

Credit : Warranty Provision $1,300

<em>Providing for amount it will cost the entity in 2027</em>

Date : 12/31/27

<u>1st increase the provision</u>

Debit : Warranty Expense $100

Credit : Warranty Provision $100

<u>then utilize the provision</u>

Debit : Warranty Provision $1,400

Credit : Cash $1,400

When warranty claim is subsequently received

Conclusion :

Warranty liability remaining = $3,900 - ($1,300 + $100)

                                              = $2,500

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