Warranty Liability | Expected Cash Flow Approach
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- Опубліковано 8 чер 2024
- This video shows how to calculate a company's warranty expense and warranty liability using the expected cash flow approach.
Traditional approaches to accruing warranty costs don't take into consideration the time value of money.
When the warranty obligation extends beyond one year, you can use the expected cash flow approach and account for the time of money.
With the expected cash flow approach, you first calculate probability-weighted cash outflows and then discount those cash outflows to their present value. The total present value of the expected cash outflows is the amount that should be accrued for warranty expense and warranty liability.
0:00 Introduction
0:53 Expected cash flow approach
1:13 Example
2:01 Calculating the expected cash flows for each year
4:34 Present value of expected cash flows
6:13 Journal entry
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What are the entries when the cost is actually incurred? Dr. Warranty Liability Cr. Cash/Bank? If the warranty cost exceeds the accrual the extra amount goes towards the expense line?
You are correct that when the actual warranty costs are incurred you would debit the Warranty Liability account and credit the Cash account (or credit the Supplies account if the company used supplies to fix the product that was returned for warranty repairs). If the actual warranty costs end up exceeding the estimated warranty costs, you can debit Warranty Expense and credit Warranty Liability as an adjustment. Conversely, if you find that over time the estimated warranty liability has far exceeded the actual warranty costs, you can reduce the Warranty Liability account by debiting it and then crediting an account like "other income"
just wanted to express my gratitude for your work! this channel has helped me in my studies in college and now in starting my job as an auditor. amazing explanation of every concept for free, thank you so much!
So happy to hear that you found the videos helpful. I hope you an excellent start to your career as an auditor, and that you have a terrific life!
@@Edspira thank you! keep up the good work :)
Cat in thumbnail 🥺❤
My wife Brooke created that thumbnail, I'm glad you like it!
I dont care about the topic. I was just curious about the cat thumbnail so I came here
Thank you ❤
You're welcome 😊
Hi, Is discounting CF for future liabilities required? I am assuming if warranty was only one year you would not calculate PV of it, also when the differences between PV and non discounted figures aren't material, you could just use "raw" numbers?