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Revenue Recognition by Frank J. Beil

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Product Warranties

Generally, warranty provisions require the seller to repair or replace the product if it fails to perform as specified contractually. Since these provisions would require the seller to incurr additional costs the sellers would spell out the warranty provisions carefully in the contract. There are two acceptable approaches to accounting for product warranties.

1. Treat the product and the warranty as a multiple-deliverable arrangement (see Chapter 2). Revenue would then be allocated to the two deliverables based on the relative-selling-price method. The revenue allocated to the product would be recognized on delivery and the revenue allocated to the warranty would be recognized over the warranty period.

2. The other acceptable ...

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