Warranty Costs and Bad Debt Expense Essay
To promote sales, the Marketing Manager offers a one-year warranty and credit sales. These warranty costs and bad debt expense are estimated at 1% of total sales and 1% of credit sales respectively. According to Mydin, since these are estimations the accountant should just ignore them. Otherwise, the amount of profit will not be accurate.
Part 1 : Learning Issues 1. What are credit sales? 2. What are warranty costs? 3. What are bad debts expenses? 4. What are the methods of accounting for bad debts expenses? 5. What are the methods to estimate bad debt expenses? 6. What are the significance of the estimation of bad debt expense and warranty cost to the financial statements? Introduction …show more content…
Warranty costs are the costs associated with the company’s commitment to repair or replace a product for a specified period of time. The actual costs of the warranty remain unknown at the point of sales until customers file their claims. However, warranty costs must be estimated when the sales revenues are recognized in order to comply with matching principle. The estimations of the warranty cost can be recorded in either Warranty Payable or Warranty Liability account.
Mydin do not fully comprehend the concept of credit sales, warranty costs and bad debt expenses. For sales transactions carried out on credit, the chances for the accounts receivable to turn uncollectible are inevitable. The portions of the uncollectible accounts are losses and expenses to the company.
At the same time, there will be deficiencies on the portable hard drives that TechnoMaju sold to their customers. The company has promise the customers to repair or replace the hard drives in order to boost the sales. Thus, cost will be incurred when customer file their claim to repair or replace. Due to the limited knowledge in the above mentioned concepts, Mydin do not understand the significance of the estimations of warranty cost and bad debt expenses to the financial statements.