Research Summary Research Paper Example

Application of Generally Accepted Accounting Principles (AGAAP) on Separately Priced Warranty

Pleasant Company specializes in manufacturing and selling of bike accessories. Goods sold by the company are of high reputation in the industry and highly priced. The prices of these goods include warranty. The company gives a lifetime warranty on all goods sold to their customers, and their shop performs the service work. The company has experienced fast growth lately due to the introduction of low priced products. In this respect, the Pleasant Co. is considering establishing a partnership with another company to deliver the warranty services. The paper discussion details some recommendation to the client on how to treat accounting for a separately purchased warranty.

A business may choose to offer a warranty for the goods to customers retain its market command. These warranties may come in many forms. There are also other cases where, warranty may be differently priced. Where a business is growing rapidly, partnering with other companies to offer warranty service can be considered as an option.
There are some businesses that may choose to offer a warranty on their products separately priced from the selling price. In this case, there should be a proper way to account for the revenue earned. The selling price of the product and warranty has to be accounted separately. Accounting principles revenue part earned from the sale of separate warrant is not ideally treated as business income but rather as a liability to discharge (605-20-25-1). In the case of a business with reputable quality products, not all sales in a given period will need replacement or repairs. In this respect, a business may come up with applying estimation method. For example, forty percent of the products sold will need replacement and repair. From this method of estimation, a business can be able to know what to treat as revenue and liability (605-20-25-1).
The reason, why this will be treated as a liability, is because the seller has some obligation to discharge in the future. Should the customer not have any claims for the specified period of warranty then, the estimation of provided would be treated back as revenue from unclaimed warranty.
In a sale contract where warranty is priced separately, the customer has an option to purchase it or just buy the good without the warranty. When a customer agrees to purchase the warranty, then the sale has to indicate what amount is paid as sales price. The sale also has clearly to indicate the warranty price for how long it is valid. Warranty agreement has to indicate terms and conditions of the service.
Incremental direct acquisition charge mainly includes costs directly associated with the acquisition or the sale of the contract. These costs are mainly charged on the revenue earned from the sale of the products. Such cost may include, advertising costs, general administrative costs and all other costs incurred in acquisition and selling of the warranty (605-20-25-4).

Recommendations and Conclusions

The paper recommends that revenue earned from the sale of warranty that is separately priced should be accounted as a liability. This is in view that business has an obligation to discharge. Both the seller and the buyers should understand terms and condition of the warranty. Costs incurred in the acquisition of a warrant are not part of revenue earned from the sale of the warranty.
Businesses may offer sale to customer with different warranty. When the sale of warranty is not included in the sale price, it is accounted for in a different way. Customers can choose to buy goods without warranty. There is a need for a clear contract to be drafted between the buyer and seller especially when the sale of warranty occurs. In situations where a sell of warranty occurs, all incremental costs should be charged to the revenue earned.