What are the rules for accruing revenues over the warranty period of a product? If a product has a 12 month warranty, I assume it is not as simple as dividing the income by 12 and accuring 1/12th of the revenue each month for 12 months?
Permitted, as in "optional".
ChEAr$, Harlan Lunsford, EA n LA
Warranties are common with most all products and unless separated on the invoice, the entire purchase price is income when sold.
Should the product fail and customer gets his money back, it is then what we call "returns and allowances".
ChEAr$, Harlan Lunsford, EA n LA
Can you expand on this? In my understanding, warranty payments are like an insurance policy payment. If the product fails, it is NOT the warranty payment that is refunded! The money at risk is the money paid for the product.
Is the answer different for software than for hardware? Is the answer different for used equipment (no manufacturer warranty) than for new?
One example: you sell a used refrigerator for $200 and agree to extend warranty to one year for $50. If the item fails in month number nine, and it cannot be replaced or repaired, I would expect the seller to refund the $200 and keep the $50 warranty revenue. How in that case would it make sense to accrue the $50 insurance / warranty payment that was never exposed to a financial loss, but not accrue the $200 product payment that is the actual revenue risk exposure to the seller?
Your OP as I understood it said that there is no separate charge for a warranty, that it's all purchase price, hence it is all federally (and state) taxable.
You last example however, there are two separate items, the 200$ which is income immediately and the seaprate $50 warranty. The latter could be earned over time I reckon. So you might have a case for taxably accruing it on a monthly basis.
ChEAr$, Harlan Lunsford, EA n LA
That's typically not true either. Often, the warranty requires repair or replacement, not purchase price refund. Some companies are still making a profit even after a warranty replacement. The money at risk (to the company) is the cost of a used item of the same type, perhaps one taken as a trade-in or an "open box" or demo item.
I'd expect the warranty to be pro-rated. It might also require refund of the full $250 (that's what I'd want as the buyer, since replacing it with warranty will cost me another $250).
Suppose you sold me insurance (warranty) against an item I bought from _someone else_. Clearly, you could accrue the cost of the warranty, but you didn't even receive the cost of the item.
Seth
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