Accuring Revenue Over Warranty Period

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Subject Author Date Accuring Revenue Over Warranty Period W 09-29-2009  Re: Accuring Revenue Over Warranty Period HLunsford 09-30-2009  Re: Accuring Revenue Over Warranty Period HLunsford 09-30-2009  Re: Accuring Revenue Over Warranty Period W 09-30-2009  Re: Accuring Revenue Over Warranty Period HLunsford 10-01-2009  Re: Accuring Revenue Over Warranty Period Seth 10-04-2009
Posted by W on September 29, 2009, 12:33 am Please log in for more thread options What are the rules for accruing revenues over the warranty period of a product? If a product has a 12 month warranty, I assume it is not as simple as dividing the income by 12 and accuring 1/12th of the revenue each month for 12 months? -- W -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by HLunsford on September 30, 2009, 9:45 am Please log in for more thread options Wallace wrote: (snipped for brevity....) >> >> But on the tax return, turns out there was this obscure little ruling a >> long time ago that permitted inclusion of the whole 36,000 in income the >> first year. Surprised the heck out of me, who is used to using accounting >> principles on an accrual tax return. > > "permitted" or "required"? > Permitted, as in "optional". ChEAr$, Harlan Lunsford, EA n LA -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by HLunsford on September 30, 2009, 9:47 am Please log in for more thread options W wrote: > > There is no separate charge for warranty. Each product comes with a 12 > month warranty (for example). So legally the company is on the line to > hand back the revenue from the product in full if it fails during the 12 > month warranty period. > > So one answer might be that tax law does not permit any accrual of revenue > unless the warranty is charged as a separate line item? > Warranties are common with most all products and unless separated on the invoice, the entire purchase price is income when sold. Should the product fail and customer gets his money back, it is then what we call "returns and allowances". ChEAr$, Harlan Lunsford, EA n LA -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by W on September 30, 2009, 10:39 pm Please log in for more thread options >W wrote: >> >> There is no separate charge for warranty. Each product comes with a 12 >> month warranty (for example). So legally the company is on the line to >> hand back the revenue from the product in full if it fails during the 12 >> month warranty period. >> >> So one answer might be that tax law does not permit any accrual of >> revenue unless the warranty is charged as a separate line item? >> > Warranties are common with most all products and unless separated on the > invoice, the entire purchase price is income when sold. Can you expand on this? In my understanding, warranty payments are like an insurance policy payment. If the product fails, it is NOT the warranty payment that is refunded! The money at risk is the money paid for the product. Is the answer different for software than for hardware? Is the answer different for used equipment (no manufacturer warranty) than for new? One example: you sell a used refrigerator for $200 and agree to extend warranty to one year for $50. If the item fails in month number nine, and it cannot be replaced or repaired, I would expect the seller to refund the $200 and keep the $50 warranty revenue. How in that case would it make sense to accrue the $50 insurance / warranty payment that was never exposed to a financial loss, but not accrue the $200 product payment that is the actual revenue risk exposure to the seller? -- W -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by HLunsford on October 1, 2009, 5:16 pm Please log in for more thread options W wrote: >> W wrote: >>> There is no separate charge for warranty. Each product comes with a 12 >>> month warranty (for example). So legally the company is on the line to >>> hand back the revenue from the product in full if it fails during the 12 >>> month warranty period. >>> >>> So one answer might be that tax law does not permit any accrual of >>> revenue unless the warranty is charged as a separate line item? >>> >> Warranties are common with most all products and unless separated on the >> invoice, the entire purchase price is income when sold. > > Can you expand on this? In my understanding, warranty payments are like > an insurance policy payment. If the product fails, it is NOT the warranty > payment that is refunded! The money at risk is the money paid for the > product. > > Is the answer different for software than for hardware? Is the answer > different for used equipment (no manufacturer warranty) than for new? > > One example: you sell a used refrigerator for $200 and agree to extend > warranty to one year for $50. If the item fails in month number nine, and > it cannot be replaced or repaired, I would expect the seller to refund the > $200 and keep the $50 warranty revenue. How in that case would it make > sense to accrue the $50 insurance / warranty payment that was never exposed > to a financial loss, but not accrue the $200 product payment that is the > actual revenue risk exposure to the seller? > Your OP as I understood it said that there is no separate charge for a warranty, that it's all purchase price, hence it is all federally (and state) taxable. You last example however, there are two separate items, the 200$ which is income immediately and the seaprate $50 warranty. The latter could be earned over time I reckon. So you might have a case for taxably accruing it on a monthly basis. ChEAr$, Harlan Lunsford, EA n LA -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Similar Threads Posted Claim home warranty, alarm system, or credit card interest? March 26, 2008, 12:18 pm Tax period March 20, 2009, 8:16 pm Short Period Return? April 20, 2006, 3:45 pm Average time period for IRS release. January 31, 2007, 4:53 pm Roth IRA: When does 5 year period start? January 30, 2008, 12:11 pm title insurance validity period April 10, 2008, 8:39 pm Google adsense revenue February 4, 2007, 2:05 am What is Government Tax Revenue Breakdown ? 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