How to Account for an Extended Warranty

While a standard warranty against product defects is treated as a loss contingency, an extended warranty is treated as a separate performance obligation under U.S. GAAP.

This means that a company selling an extended warranty would initially record the cash received (or accounts receivable) from the customer and record unearned revenue (a liability). The company would not record revenue related to the extended warranty until a portion of the extended warranty period has elapsed.

For example, let's say a company sells a product with a standard 3-year warranty, but the company also offers the customer the opportunity to purchase an additional 2-year warranty (extending the warranty period to 5 years in total) for the additional price of $200. If the customer purchases the extended warranty, the company would recognize the $200 as revenue over the course of years 4 and 5 (usually on a straight-line basis; thus, $100 of revenue would be recognized at the end of year 4 and $100 of revenue would be recognized at the end of year 5).

Any costs associated with the extended warranty would be recognized in the periods covered under the extended warranty; this is to ensure matching of the costs with the periods in which they generate revenue.

0:00 Standard warranty
1:30 Non-standard warranty
3:25 Example
4:14 Journal entry for standard warranty
4:50 Accounting for extended warranty
5:35 Journal entry for extended warranty
—
Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education freely available to the world.
—
SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS:
• A 23-PAGE GUIDE TO MANAGERIAL ACCOUNTING
• A 44-PAGE GUIDE TO U.S. TAXATION
• A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS
• MANY MORE FREE PDF GUIDES AND SPREADSHEETS
http://eepurl.com/dIaa5z
—
SUPPORT EDSPIRA ON PATREON
*  / prof_mclaughlin  
—
GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT
https://edspira.thinkific.com
—
LISTEN TO THE SCHEME PODCAST
Apple Podcasts: https://podcasts.apple.com/us/podcast...
Spotify: https://open.spotify.com/show/4WaNTqV...
Website: https://www.edspira.com/podcast-2/
—
GET TAX TIPS ON TIKTOK
  / prof_mclaughlin  
—
ACCESS INDEX OF VIDEOS
https://www.edspira.com/index
—
CONNECT WITH EDSPIRA
Facebook:   / edspira  
Instagram:   / edspiradotcom  
LinkedIn:   / edspira  
—
CONNECT WITH MICHAEL
Twitter:   / prof_mclaughlin  
LinkedIn:   / prof-michael-mclaughlin  
—
ABOUT EDSPIRA AND ITS CREATOR
https://www.edspira.com/about/
https://michaelmclaughlin.com