Question

Cizmar Company sells a television that carries a 90-day unconditional warranty against product failure. From prior years’ experience, Cizmar estimates that 4% of units sold each period will require repair at an average cost of $150 per unit. During the current period, Cizmar sold 22,000 units and repaired 200 units.

How much warranty expense must Cizmar report in its current period income statement?

Answer 1

A warranty represents a term of a contract that specifies the conditions under which the vendor or producer will repair, replace, or compensate for a defective item without any cost to the buyer or user.

Warranty expense is recognized in the same period as revenue for the sold products if there is a probability that an expense will be incurred, and the company can estimate the amount of the expense. The practice is referred to as the matching principle when all expenses relevant to a product sale are recognized in the same period.

The income statement is impacted by the full amount of warranty expense when a sale occurs, even if there are no warranty claims during the period. When claims appear in the later accounting periods, the only further impact is made on the balance sheet, since the company reduces both the warranty liability and inventory accounts.

It is given in the question that Cizmar estimates that 4% of units sold each period will require repair at an average cost of $150 per unit and the current period sales is 22000 units.

Therefore the warranty expense reported in the current period income statement is-

= 150 * ( 22000 * 4%)

=150 * 880

= 132000//