Product Warranties Provide an original and substantive response to the questions

Question

Product Warranties
Provide an original and substantive response to the questions posed in your Journal in a minimum of 200 words.

Product warranties are an interesting liability on a client’s books. When a car company issues a recall for a defective part, management can easily determine the number of units sold and to whom, as well as estimate the parts and labor necessary. Chances are a good number of consumers will elect to have the work done.

Think about other companies, such as a luggage manufacturer. Suppose you purchased a luggage set 5 years ago for $300. The luggage came with a lifetime warranty, serviced only by the manufacturer and not the retailer. You have noticed a rip in the fabric, but you do not want to go through the trouble of mailing the suitcase back for repair. Of course the company would honor your claim if you chose to send in your suitcase, but did they set aside proper liability reserves?

If you were auditing the luggage company, how would you gain confidence in management’s accounting for warranty claims?
Would you assume the company adequately accounts for the number of people who might make claims?
What information would you use to gain confidence in their valuation?
What are some other warranty situations where it is more of a guessing game as to how many claims could be filed in any given year?

Explanation / Answer

Yes the warranty liability is tricky part for any manufacturing company who sell products on warranty. When the product is sold in "X" year and in the same year the warranty liability / expense has to be recorded in same year based on the some estimation.It can be As per past hoistory , we can calculate what % of sales are estimated to be called back for repair and what is the average cost incurred for reparing the product. Using this information we can predict and provide provision for the warranty of the products sold in an year. The past information should be taken warranty expense(from P&L) and warranty liability(from Balance Sheet). This data has to be compared with the actual warranty expense incurred every year. The other situations like this are allowance for doubtful debts, selling of a car which have 3 year warranty , selling of Air conditioner etc

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