What is Warranty liability?
In short
A warranty liability is the estimated cost of honoring warranties on products already sold. For an assurance-type warranty, which promises the product works as specified, the cost is accrued as an expense in the year of sale.
Key takeaways
- A service-type warranty, sold separately or giving extra service, is a separate performance obligation: revenue is deferred, not a cost accrued.
- Paying claims reduces the liability, not expense.
- Estimates are based on claims history and revised as experience changes.
Where it's tested
FAR: Current Liabilities, Contingencies & Commitments — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Sales were $2,000,000 and warranty costs are estimated at 3% of sales. Actual claims paid were $45,000 and the beginning warranty liability was $18,000. What is the ending warranty liability?