Fixed Assets Warranty Accounting

This post on fixed assets warranty accounting or product warranty accounting deals with the treatment of warranties in the bookkeeping records of a business purchasing a fixed asset such as property, plant or equipment.

The treatment in the bookkeeping records of the supplier of the asset is a separate accounting issue discussed in our posts on warranty costs and extended warranty accounting.

When an asset is purchased the costs which are capitalized include both the cost of the asset itself and the costs incurred in bringing the asset to the location and working condition ready for its intended use, such as shipping, installation and testing costs.

The question arises as to whether or not fixed assets warranty costs can be treated as part of the capitalized cost of acquiring the asset.

For the purposes of this discussion fixed asset warranties are considered as either embedded or extended.

Embedded Fixed Assets Warranty

An embedded warranty is one which is included as part of the cost of the asset and not identified as a separate cost to the purchaser. For example the supplier might include a one year manufacturers warranty.

In these circumstances as far as the purchaser is concerned it is part of the cost of the asset itself and is simply capitalized in accordance with the above definition.

Extended Fixed Assets Warranty

An extended warranty is one which is is sold separately to the product itself. For example for an additional fee the supplier might sell an extended warranty to cover the product for a further two years after the embedded manufacturers warranty expires.

In this instance the purchase of the extended warranty protects the equipment in the future but is not necessary to enable the equipment to be brought into use.

In the circumstances the extended fixed assets warranty is not a cost incurred in ‘bringing the asset to the location and working condition ready for its intended use’ and therefore does not fall with the definition of costs which can be capitalized.

The extended warranty is however still an asset and in effect represents a deferred expense for the business.

Fixed Assets Warranty Example

A business purchases equipment costing 20,000 including a one year manufacturers warranty. In addition the business buys an extended fixed assets warranty for 600, valid for a period of 30 months after the manufacturers warranty expires.

Asset and Warranty Purchase

The embedded manufacturers warranty is included as part of the cost of the asset itself and is therefore capitalized. The extended warranty is a separate cost and does not fall within the definition of ‘bringing the asset to the location and working condition ready for its intended use’ and is treated as a deferred expense.

The deferred expense asset is shown below under the account referred to as extended warranties.

The bookkeeping journal to post the transaction is as follows.

Fixed assets warranty journal entry
Account Debit Credit
Equipment 20,000
Extended warranties 600
Cash 20,600
Total 20,600 20,600

Treatment of the Deferred Expense

After the period of one year the manufacturers warranty ends and the extended fixed assets warranty starts and then continues for a period of 30 months. Each month the amount utilized is transferred from the deferred expense account to the income statement.

The amount utilized each month is calculated as follows.

Extended warranty cost = 600
Term = 30 months
Monthly expense = 600/30 = 20

The journal entry to post the expense is shown below.

Monthly fixed assets warranty expense
Account Debit Credit
Warranty expense 20
Extended warranties 20
Total 20 20

This process continues for 30 months until the entire cost of the extended warranty has been transferred as an expense to the income statement.

Current or Long Term Asset

At the end of any financial year the amount of the extended warranty that will be used in the next 12 months is classified as a current asset and the amount to be used after 12 months is classified as a long term asset.

For example, if at the end of the financial year the balance on the extended warranty account is 400 then the amounts classified as a current and long term asset are calculated as follows.

Extended warranty cost = 600
Term = 30 months
Monthly expense = 600/30 = 20

Extended warranty account balance = 400
Current asset = 20 x 12 = 240
Long term asset = 400 - 240 = 160 

Obviously if the asset is disposed of before the extended fixed assets warranty has expired then the balance on the extended warranty account cannot be treated as an asset and must be transferred to the income statement as an expense.

Fixed Assets Warranty Accounting October 31st, 2018Team

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