Question

How is estimating warranties similar or different from estimating uncollectibles for accounts receivables under allowance method? Explain.

Answer 1

Under allowance method the uncollectible accounts receivable is similar to estimated warranty costs because the estimation of the future events are made and the cost to the company is charged to income in the sale period. When specific items become breakdown or uncollectible; the cost to the firm is charged to income in the sale period, not in the later period. The charge against income is reported as expenditure in both scenarios. The treatment of accounting differs in that the balance sheet account reflecting the expected costs of future uncollectible is subtracted from an asset account, and the estimated warranties are shown as a liability