Accounting for Warranty Expense

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Questions and Answers

What is the primary purpose of withholding income taxes and contributions to social security systems from an employee's gross payroll?

To recognize the amounts withheld as current assets

To reduce the employer's tax liability

To reduce the employee's net take-home pay

To recognize the amounts withheld as current liabilities until remitted to the appropriate government agency (correct)

How should the employer account for the withheld income taxes and contributions?

As a current asset

As an expense

As a revenue deduction

As a current liability (correct)

What is the net payroll in the illustrative example?

P473,000 (correct)

P427,000

P500,000

P480,000

Which of the following is NOT a type of contribution withheld from an employee's gross payroll?

Employee retirement plan Signup and view all the answers

What is the purpose of recording the withholding tax payable and other contributions payable in a separate account?

To recognize them as a current liability until remitted to the appropriate government agency Signup and view all the answers

What is the total amount of contributions withheld from the employee's gross payroll in the illustrative example?

P7,000 Signup and view all the answers

What type of account is used to record the gift certificates sold by megamalls, department stores, and supermarkets?

Gift certificates payable Signup and view all the answers

Why are the amounts withheld from the employee's gross payroll considered as current liabilities?

Because they are owed to the government and must be remitted Signup and view all the answers

What is the journal entry to record the sale of 1,000 units of television sets at P9,000 each for cash?

Debit Cash P9,000,000, Credit Sales P9,000,000 Signup and view all the answers

What is the purpose of the journal entry to set up the estimated liability on the warranty?

To estimate the warranty cost for the units sold Signup and view all the answers

What is the estimated warranty cost per set?

P500 Signup and view all the answers

What is the percentage of units sold that are expected to be returned for repair?

60% Signup and view all the answers

What is the journal entry to record the payment of the actual cost of warranty?

Debit Estimated Warranty Liability P180,000, Credit Cash P180,000 Signup and view all the answers

What is the total amount of cash received from the sale of 1,000 units of television sets?

P9,000,000 Signup and view all the answers

What happens if the actual cost of warranty exceeds the estimated warranty cost?

The difference is charged to warranty expense Signup and view all the answers

When a gift certificate is sold, what is the correct journal entry?

Debit Cash, Credit Unearned Revenue for Gift Certificates Signup and view all the answers

What is the term used to describe the non-redemption of gift certificates under IFRS 15?

Breakage Signup and view all the answers

When a gift certificate is redeemed, what happens to the Gift Certificates Payable account?

It is credited Signup and view all the answers

What is the journal entry when a gift certificate is not redeemed and is considered forfeited?

Debit Unearned Revenue for Gift Certificates, Credit Gift from Forfeited Gift Certificates Signup and view all the answers

What is the basis for recognizing revenue from breakage under IFRS 15?

The value of certificates redeemed in proportion to the expected value of certificates to be redeemed Signup and view all the answers

What is the accounting treatment for gift certificates issued relating to sales promotion?

Record as unearned revenue until redeemed Signup and view all the answers

What is the purpose of the journal entry 'Debit Cash, Credit Unearned Revenue for Gift Certificates'?

To record the sale of gift certificates Signup and view all the answers

What happens to the Unearned Revenue for Gift Certificates account when a gift certificate is redeemed?

It decreases Signup and view all the answers

What is the expected value of certificates to be redeemed?

P4,500,000 Signup and view all the answers

What is the journal entry to record the sale of gift certificates?

Debit Cash, Credit Deferred Revenue – gift certificates Signup and view all the answers

What is the breakage revenue?

P200,000 Signup and view all the answers

What is the journal entry to record the breakage revenue?

Debit Deferred Revenue – gift certificates, Credit Breakage Revenue Signup and view all the answers

What is the definition of refundable deposits?

Cash or property received from customers but are refundable after compliance with certain conditions. Signup and view all the answers

What is the expected value of breakage?

P500,000 Signup and view all the answers

What is the value of certificates redeemed?

P1,800,000 Signup and view all the answers

What is the journal entry to record the value of certificates redeemed?

Debit Deferred Revenue – gift certificates, Credit Sales Signup and view all the answers

What is the primary criterion for classifying a liability as current or noncurrent?

The timing of the realization Signup and view all the answers

Which of the following is an example of noncurrent deferred revenue?

Long-term service contracts Signup and view all the answers

What is the journal entry to recognize earned revenue when RC Plowing plows for Java Corporation?

Deferred revenue 1,000, Plowing revenue 1,000 Signup and view all the answers

What is the initial journal entry when Java Corporation pays RC Plowing in advance?

Cash 5,000, Deferred revenue 5,000 Signup and view all the answers

How often does RC Plowing recognize earned revenue in the illustrative example?

Monthly Signup and view all the answers

What is the total amount of deferred revenue initially recognized by RC Plowing?

P5,000 Signup and view all the answers

What is the purpose of recognizing deferred revenue?

To delay recognizing revenue until it is earned Signup and view all the answers

What is the accounting treatment of unearned subscription?

Recognized as revenue when earned Signup and view all the answers

Study Notes

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.

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Description

This quiz covers the accounting treatment for warranty expenses when the actual cost differs from the estimated liability. Learn how to adjust for the difference.