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Provision for warranty

(Querist) 01 December 2011 This query is : Resolved 
IS provision for warranty allowable expenditure or disallowable expenditure?
Does it make any difference if provision has been made on some scientific basis?
Does it make any difference if warranty to be discharged at a near future or remote future?
If the provision for warrany is a allowable expenditure, what happen if the warranty is not to be paid, as generally these are applicable for a certain period.
C. P. CHUGH (Expert) 20 March 2012

1) Warranty claims according to a contract and supported with documentary evidence should be admissbible expenditure.

2) Any amount standing credit to the account of warranty claims payable at the expiry of warranty period is to be offered for taxation in the year in which such warranty expires.

3) This should be according to consistently and continously follwed method of accounting. One cannot shuffle between provisions and actual payments from year to year.

4) Separate account is maintained for each year provision and any payments made towards that provisions in subsequent year so as to determine unpaid liability.

Alternatively,

In all consumer durable the sale price of the product is inclusive of warranty liability. In some businesses instead of providing for warranty claims, part of sales realisation are transfered to warranty claim reserve account in the intial year of realisation and then all payments made towards warranty claim are debited to this account. Resultant income on expiry of warranty period is treated as income in the year the warranty expires.


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