342 - and disclose it in its books of account by debiting...

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Warranty is a kind of contingent liability. If the amount of this liability is probable and can be reasonably estimated and determined, then such liability should be recorded and disclosed in the books of accounts. In the books of accounts such liability can be accounted by crediting a liability and debiting an expense account. While if this liability is probable but cannot be reasonable estimated and determined, then it should be appropriately disclosed in the notes to the financial statements. In the case of Product Grey, the amount of warranty charges to be incurred can be estimated reasonably from the past experiences; therefore it should record such liability
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Unformatted text preview: and disclose it in its books of account by debiting the product warranty charges account (expense) and crediting product warranty payable account (liability). In the case of product Yellow, since it a new product for which warranty charges which may be incurred cannot be estimated reasonably, but at the same time are likely to be incurred, it should disclose this contingent liability in its notes to the financial statements. Contingent liabilities are accounted for and disclosed so that the financial statements reveal the true and fair picture....
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This note was uploaded on 10/03/2011 for the course ACCOUNTING 103 taught by Professor Ngo during the Spring '11 term at University of California, Berkeley.

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