How should Warren Teas, Inc. account for future repair work on warranty for its brewing equipment?

What should Warren Teas, Inc. do at year-end regarding the warranty on its brewing equipment?

Warren Teas, Inc. should recognize a liability of $1,000 for estimated future repair work under the warranty for the brewing equipment sold. This will be accounted for as 'Warranty Expense' on the income statement and 'Estimated Warranty Liability' on the balance sheet.

Understanding Warranty Liability for Warren Teas, Inc.

Warren Teas, Inc. has sold all its brewing equipment to customers with a 6-month warranty. At year end, the company estimates that future repair work on the warranty will cost $1,000. In order to properly account for this future expense, Warren Teas, Inc. should recognize a liability on its financial statements.

Recording the Liability

At the end of the year, Warren Teas, Inc. needs to record a liability for the estimated future repair work under the warranty. This is done to reflect the financial obligation that the company anticipates incurring in the upcoming months due to its warranty agreement with customers.

Accounting Treatment

The liability of $1,000 for warranty repair work should be recorded as 'Warranty Expense' in the company's income statement. Additionally, it should also be reflected as 'Estimated Warranty Liability' on the balance sheet. This approach follows the accrual accounting principle, where expenses are recognized when they are incurred, rather than when they are paid.