Service Warranties

question 4

Essay

Service warranties. Warranties that provide an additional service beyond the assurance-type warranty. This warranty is not included in the sale price of the product and is referred to as a service-type warranty.
a. Companies do not record a separate performance obligation for assurance-type warranties. These types of warranties are nothing more than a quality guarantee that the good or service is free from defects at the point of sale. These types of obligations should be expensed in the period the goods are provided or services performed. In addition, the company should record a warranty liability. The estimated amount of the liability includes all the costs that the company will incur after sale and that are incident to the correction of defects or deficiencies required under the warranty provisions.
Warranties that provide the customer a service beyond fixing defects that existed at the time of sale represent a separate service and are an additional performance obligation. As a result, companies should allocate a portion of the transaction price to this performance obligation. The company recognizes revenue in the period that the service type warranty is in effect.

---

Definitions:

Expected Return

The average amount of profit or loss one can anticipate on an investment, accounting for the probabilities of varying outcomes.

Standard Deviation

A statistic that measures the dispersion of dataset relative to its mean and is calculated as the square root of the variance.

Covariance

A measure that indicates the extent to which two securities move in the same or opposite directions.

Stock Selection Return

The return achieved by an investor that can be attributed to the specific stocks chosen for investment, rather than the overall market movement.