Understanding warranty expense

CFA Level II FRA
#1

How are warranty expense recorded? is my understanding below right?

lets say I sold $1000 worth computer system and I reserve $300 for warranty expense. would my income statement look like below?

Revenue: 1000

warrenty exp: 300

EBIT: 700

tax …

Net Income …

At the same time I would record liability of $300

lets say next year i incurr warrenty expense of $100. meaning i would reduce the liability to $200.

a year after that the warrenty is expired and I want to remove the liability. I simply remove the liability? or bring it back to Income statement as revenue?

appreciate if anyone can explain…

#2

You’d remove the liability and show it as a revenue on the income statement, Unincurred Warranty Expense, or some such thing.

#3

I was hoping you’d answer this. Thank you…

Is remaining understanding correct?

#4

Yes.

#5

thank you very much… smiley

#6

My pleasure.