Fusion, Inc. introduced a new line of circuits in 2016 that carry a four-year warranty against...


Fusion, Inc. introduced a new line of circuits in 2016 that carry a four-year warranty against manufacturer's defects. Based on experience with previous product introductions, warranty costs are expected to approximate 3% of sales. Sales and actual warranty expenditures for the first year of selling the product were:

  Actual Warranty
 Sales  Expenditures
 $15 million  $200,000

1. Does this situation represent a loss contingency? Why or why not? How should it be accounted for?

2. Prepare journal entries that summarize sales of the circuits (assume all credit sales) and any aspects of the warranty that should be recorded during 2016.

3. What amount should Fusion report as a liability at December 31, 2016?

Warranty and Service Costs:

When a company offers a product warranty, it incurs warranty costs on the date that products are sold, not only when they are returned for repair. The warranty cost should therefore be recognized when the sales revenue is recorded.

Answer and Explanation: 1

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1. This situation does not represent a loss contingency. A contingency is a loss that may or may not be incurred. In the case of service warranties,...

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Recording Warranty and Service Costs


Chapter 7 / Lesson 5

Explore ways businesses record, calculate, and account for warranty and service costs. Examine what warranty and service costs are, discover methods of finding expense percentages and how to assign the costs to an account, and view an example.

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