Scribd
Upload
148 views3 pages

Exercise 13.22

This document provides an example of accounting for warranty costs under both the assurance-type (expense) approach and the service-type (revenue) approach. Under the assurance-type approach, all sales revenue is recognized upfront and warranty expense includes actual and estimated future costs. Under the service-type approach, sales revenue is split between the product and warranty service, with warranty revenue recognized as the service is performed. The document recommends adopting the service-type approach for this situation. This approach better matches income with when it is earned and would be consistent with required IFRS accounting after a potential public offering.

Uploaded by

Myname
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
148 views3 pages

Exercise 13.22

This document provides an example of accounting for warranty costs under both the assurance-type (expense) approach and the service-type (revenue) approach. Under the assurance-type approach, all sales revenue is recognized upfront and warranty expense includes actual and estimated future costs. Under the service-type approach, sales revenue is split between the product and warranty service, with warranty revenue recognized as the service is performed. The document recommends adopting the service-type approach for this situation. This approach better matches income with when it is earned and would be consistent with required IFRS accounting after a potential public offering.

Uploaded by

Myname
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

EXERCISE 13.

22

a. Assurance-type (expense approach):

Accounts Receivable........................................................
3,000,000
1
Sales Revenue ........................................................
3,000,000
1
(1,000 X $3,000)
To record sales on account

Warranty Expense............................................................
105,000
Cash..........................................................................
105,000
To record payment of warranty expense

Warranty Expense2...........................................................
95,000
Warranty Liability ...................................................95,000
2
[(1,000 X $200) – $105,000]
To accrue warranty expense

December 31, 2020 financial statement amounts reported:

Balance Sheet
Warranty liability $95,000

Income Statement
Sales revenue $3,000,000
Warranty expense 200,000

Service-type (revenue approach):

Accounts Receivable........................................................
3,000,000
Sales Revenue.........................................................
2,650,000
Unearned Revenue..................................................350,000
To record sales on account

Warranty Expense............................................................
105,000
Cash..........................................................................105,000
To record warranty expense
Unearned Revenue...........................................................
183,750
1
Warranty Revenue ..................................................183,750
1
[$350,000 X ($105,000/$200,000)]
To remeasure unearned revenue

December 31, 2020 financial statement amounts reported:

Balance Sheet
Unearned revenue $166,250

Income Statement
Sales revenue $2,650,000
Warranty revenue 183,750
Warranty expense 105,000

b. The recording of assurance-type and service-type warranties is


the same under IFRS and ASPE. However, under ASPE it is
based on the principle that when revenue covers a variety of
deliverables (bundled sales) it should be unbundled and the
revenue allocated to the various goods or services that are
required to be performed.

c. When the assurance-type approach is used to account for


warranty costs, sales revenue will be higher because it is all
considered to be earned upon the sale of the product. As well,
the expense on the income statement will represent the total
estimated costs of servicing the warranties (i.e., the actual costs
of servicing the warranty in the period, plus a year-end
adjustment for expected future costs.) Therefore, the total gross
profit on the warranty work is recognized in the period the
equipment is sold.

When the service-type approach is used, sales revenue will be


lower because the total selling price is allocated between the sale
of the product and the sale of the warranty service. There will be
an unearned revenue liability account for the portion of the
warranty that has not been taken into revenue at year end.
Warranty expense will be equal to the actual costs of servicing
the warranty during the year. In summary, the profit on the
warranty work is recognized later under the revenue approach—
in the period in which the warranty work is performed.

In this situation, it makes more sense to choose the service-type


approach. In this way, income is reported as it is earned, and is a
better measure of performance. In addition, as the company is
considering going public in a few years, and the bifurcation of
revenues to multiple deliverables is required by IFRS, the
service-type approach would be consistent with what will be
required after the company goes public. It would make sense to
adopt this accounting policy now so that a retrospective change
is not required later.

You might also like