Accounting for Warranty Expense

Warranty Expense

• If the actual cost exceeds the estimate, the difference is charged to warranty expense.
• If the actual cost is less than the estimated, the difference is an adjustment to warranty expense.

Illustrative Example 4: Warranty Expense

• An entity sells 1,000 units of television sets at P9,000 each for cash.
• Each set is under warranty for one (1) year, and the entity has estimated from experience that warranty cost will probably average P500 per unit.
• The entity incurs P180,000 for repairs during the year.
• To record the sale, the entry is: Cash 9,000,000; Sales 9,000,000.
• To set up the estimated liability on the warranty, the entry is: Estimated Warranty Liability 300,000; Cash 300,000.
• Estimated warranty cost is calculated by multiplying the estimated sets to be returned (600) by the estimated warranty cost per set (P500).

Current Liability

• Current liability includes income tax payable by the employee, employee contributions to Social Security System (SSS), Home Development Mutual Fund (HDMF), and Philippine Health Insurance Corporation (PhilHealth).
• Illustrative Example 6: Royal Company reported the payroll of its employees for September, showing gross payroll, income taxes withheld, SSS contribution, Pag-IBIG contribution, and PhilHealth contribution.

Gift Certificates Payable

• When gift certificates are sold: Cash XXX; Gift Certificates Payable XXX.
• When gift certificates are redeemed: Gift Certificates Payable XXX; Sales XXX.
• When gift certificates are not redeemed: Gift Certificates Payable XXX; Forfeited Gifts Certificates XXX.

Illustrative Example 7: Gift Certificates

• Glorietta Corporation sells gift certificates redeemable in merchandise.
• The entity has a pricing policy allowing 30% profit on the sales price.
• Unearned revenue from gift certificates outstanding, January 1, 2X16, is P500,000.
• The entries for the year 2X16 related to the previous information are:
  • Cash 1,800,000; Unearned Revenue for Gift Certificates Outstanding 1,800,000.
  • Cash 200,000; Sales 200,000; Unearned Revenue for Gift Certificates Outstanding.
  • Unearned Revenue for Gift Certificates Outstanding 1,800,000; Sales 1,800,000.
  • Unearned Revenue for Gift Certificates Outstanding 25,000; Gift from Forfeited Gift Certificates 25,000.

Breakage Revenue

• Under IFRS 15, the non-redemption of gift certificates is referred to as "breakage".
• The seller shall recognize revenue from breakage based on the value of certificates redeemed in proportion to the expected value of certificates to be redeemed.
• Illustrative Example 8: Expected value of breakage is P500,000; expected value of certificates to be redeemed is P4,500,000; value of certificates redeemed is P1,800,000.
• Breakage revenue is equal to the proportion of the value of certificates redeemed to the expected value of certificates to be redeemed multiplied by the expected value of breakage.

Journal Entries for Breakage Revenue

• To record the sale of gift certificates: Cash 5,000,000; Deferred Revenue – Gift Certificates 5,000,000.
• To record the value of certificates redeemed: Deferred Revenue – Gift Certificates 1,800,000; Sales 1,800,000.
• To record the breakage revenue: Deferred Revenue – Gift Certificates 200,000; Breakage Revenue 200,000.

Refundable Deposits

• Refundable deposits consist of cash or property received from customers but are refundable after compliance with certain conditions.
• It may be realized within one (1) year or more than a year from the end of the reporting period.
• It is a current liability if it is realizable within a year, and a noncurrent liability if it is realizable for more than a year.
• Examples of current deferred revenue are unearned interest income, unearned rental, and unearned subscription, while examples of noncurrent deferred revenue are long-term service contracts and long-term leasehold advances.

Illustrative Example 10: Refundable Deposits

• Java Corporation hired RC Plowing to plow its parking lot and paid P5,000 in advance.
• RC records all P5,000 in a deferred revenue account: Cash 5,000; Deferred Revenue 5,000.
• RC expects to plow for Java for five (5) months, so it elects to recognize P1,000 of the monthly deferred revenue.
• To journalize this transaction, RC records the following entry each month to recognize earned revenue: Deferred Revenue 1,000; Plowing Revenue 1,000.