Contingent Liabilities Many companies provide warranties with their products. Such warranties typically guarantee the repair or...

Contingent Liabilities Many companies provide warranties with their products. Such warranties typically guarantee the repair or replacement of defective goods for some specified period of time following the sale. Conceptual Connection: Why do most warranties require companies to make a journal entry to record a liability for future warranty costs?

Solutions

Expert Solution

Warranty is a future laibility to the company beacuse of present sale. The matching principle states that entity's revenue should match with its expenses. Suppose the sale took place in 2013 and warranty is claimed in 2020 then the company will recognise an expense in 2020 which is against matching principle.

So to abide with the matching principle the company has to create a provision for warranty claims by recording a journal entry.

ekkarill92 answered 1 year ago

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