Service Warranty Journal Entries

Lesson:

An service warranty is an extra purchase over and above an offering's price.

Assuming that there will be a reasonably estimable value for the warranty's ultimate cost to the vendor, it must be booked at time of sale.

You're an accountant trying to figure out how to book some assurance warranty information on the balance sheet.

You've been provided with the following information:

  • The purchase was made with credit.
  • One year has passed since the service warranty went into effect, and no claims have been made by the customer.
  • The business accepted $1,414 in cash as payment for the service warranty.
  • The lifetime of the warranty is 2 years.
What are the journal entries that need to be made to the balance sheet, one year after purchase of the service warranty?

Answer:

  • Sales of a Service Warranty
    Unearned Revenue     $707.00    
         Revenue     $707.00    

Explanation:

  1. We do need to calculate the revenue each year that is earned on the service warranty.
    YEARLY EARNED REVENUE = REVENUE / YEARS OF WARRANTY
  2. Filling in the numbers we know, we see:
    YEARLY REVENUE = $1414 / 2
  3. Now we solve for the revenue we can claim each year:
    YEARLY REVENUE = $707
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