Financial Accounting: Assurance vs. Service-Type Warranty Methods

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Warranty Assignment
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Contents
Introduction......................................................................................................................................3
E13-22..............................................................................................................................................4
Conclusion.......................................................................................................................................8
References........................................................................................................................................9
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Introduction
In this assignment the calculation of the warranty has been performed. This will enable the
individual to understand the calculation that are made in respect of calculation of the warranty.
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E13-22
Question a. Present journal entries under assurance type approach and service type
approach for the warranty?
Presentation under assurance type and service type approach is different. In assurance type
approach it generates only one revenue source however in service type approach two types of
revenue is generated one is from sale of the product and second is from sale of contract of
warranty as service revenue. Due to deferment of profit portion in future years in service type
approach it generates lower level of income in year of sale of the product. Assurance type
approach is also called as expense approach and service type approach is also called as service
type approach.
Journal entries under assurance type approach
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Journal entries
Particular
Amount
($)
Amount
($)
Cash a/c Dr. 300000
To Sales Revenue a/c 3000000
(Being sales made)
Profit and loss a/c Dr. 200000
To Provision of warranty a/c 200000
(Being provision is made)
Warranty expense a/c 105000
To cash a/c 105000
(Being warranty expense is paid)
Provision of warranty a/c Dr. 105000
To warranty expense a/c 105000
(Being provision is transferred to liability
account)
Provision of warranty a/c Dr. 95000
To warranty liability a/c 95000
(Being warranty liability is created)

Financial statement under assurance type approach
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Financial statement for year end 2017
Particular Amount ($)
Balance sheet
Warranty Liability 95000
{(1000*200)-105000}
Income statement
Sales revenue 3000000
Provision of warranty 200000

Journal entries under service type approach
Journal entries
Particular
Amount
($)
Amount
($)
Cash a/c Dr. 3000000
To Sales Revenue a/c 2650000
To Unearned Warranty income a/c 350000
( Being sales is made)
Warranty expense a/c Dr. 105000
To cash a/c 105000
( Being warranty claim is paid)
Unearned warranty income a/c Dr. 183750
To warranty revenue a/c 183750
( Being proportionate revenue is
recognized)
Warranty revenue a/c Dr. 183750
To profit and loss a/c 183750
( Being warranty income is recognized in
p&l)
Profit and loss a/c Dr. 105000
To Warranty expense a/c 105000
( Being expense is recognized)
Financial statement under Service type approach
Financial statement for year end 2017
Particular Amount ($)
Balance sheet
Unearned warranty income 166250
Income statement
Sales revenue 2650000
Warranty revenue 183750
Warranty expense 105000
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Question b. Define whether assurance type and service type warranties are recorded in
IFRS and ASEP differently?
Recording of warranties in Service type and assurance type approach are similar under IFRS and
ASEP. There is only one difference in ASEP where revenue is generated in aggregate sale of
products then warranty revenue is allocated to the individual sale variable and not on the
aggregate sales. It allocated on the goods and services which are needed to perform.
Question c. Mentioned the advantage and disadvantage of above two approaches?
Both approaches have its advantage and disadvantages. In assurance type approach sales income
is higher as in this approach it is assumed that revenue is earned at the time of sale of the
product. Total estimated cost of warranties is mentioned in the income statement of the current
year. Overall gross profit from the warranties work is also recognized in the year in which
product is sold.
In service type approach sales income is will be lower as total selling price is divided in the
warranty service and product sale. The portion of warranty work which is not taken into account
of revenue is classified as unearned warranty revenue liability. In this approach warranty
expenses is equal to the actual cost of servicing the warranty. In nutshell revenue of warranty
work is recognized when warranty work is actually performed.
Service type approach is more suitable for the Novack Machinery Co. because this approach
recognize revenue when it’s actually earned and this leads to suitable criteria for performance
evaluation. More over company is planning for going public and there is requirement of
diversification of income arise from aggregate sale of variables under IFRS. In service type
approach this requirement is already followed hence it would make more sense for company to
adopt this approach. Company will not require to do any retrospective change in the future with
this approach.
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Conclusion
After the completion of the assignment it can be said that the calculation of the warranty has
enabled the individual to understand the basic concept of warranties and how to make the
calculation in this respect.
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References
 Anastasiadis, S., Anderson, B. and Chukova, S., 2013. Auto warranty and driving
patterns. Reliability Engineering & System Safety, 116, pp.126-134.
 González-Prida, V., Barberá, L., Márquez, A.C. and Fernández, J.G., 2014. Modelling
the repair warranty of an industrial asset using a non-homogeneous Poisson process and a
general renewal process. IMA Journal of Management Mathematics, 26(2), pp.171-183.
 Nasrum, A. and Husniah, H., 2016. PREVENTIVE MAINTENANCE OPTIMIZATION
FOR PRODUCT WARRANTY TWO-DIMENSIONAL BY ONE DIMENSIONAL
APPROACH. Journal of Math Sciences, 1(2 October), pp.11-18.
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