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If the company can reasonably estimate the amount of warranty claims likely to arise under the policy, it should accrue an expense that reflects the cost of these anticipated claims. The accrual should take place in the same reporting period in which the related product sales are recorded.

A business typically recognizes warranty expenses during the same period as its product sales, as long as the business anticipates incurring the expense and has a reasonable estimation of the expense amount. Generally, the actual warranty expense a company accrues can vary from the historical warranty percentage.

Explanation: Warranty expense should be recorded in the period that the product is sold.

Warranty expense is recorded in the same period that the sale occurs. There is no standard way to estimate total warranty expense, so management should either use historical data to derive the figure or use a defensible method to deriving an estimate.

Warranty Expense Recognition While recording the event in the financial statements, the company will debit (charge) the warranty expense account and credit (accrue) a liability account when the product is sold to a client.

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 the replacement parts and products sent to customers.

How to calculate warranty expenses Find the total number of products sold. ... Determine the percentage of defective products. ... Calculate the number of products needing replacement. ... Evaluate the cost of product replacement. ... Estimate the total warranty expense.

Expense Warranty (Accrual) approach ? if the warranty is inseparable from the product being sold and warranty costs are probable and can be reasonably estimated, accrue these costs as a liability in the year of sale.

An assurance or promise in a contract, the breach of which may give rise to a claim for damages. Although a breach of a warranty may entitle the person taking the benefit of it to a remedy for breach of contract, in finance documents, such a breach also constitutes an event of default.

Below are some of the most common reasons warranties are invalidated by merchants: The warranty period has expired. The defect or part is not covered. The product failure is due to misuse or lack of proper maintenance.