Warranties pose an accounting challenge because a company does not know which or how many products will have to be repaired.

Question

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Warranties are contingent liabilities, meaning they are dependent on a future event (i.e. a product malfunctioning), and the exact amount of repairs cannot be predicted with certainty. This uncertainty makes accounting for warranties challenging because companies have to estimate the potential cost of repairs and record them as expenses even before they occur.

Warranties Pose an Accounting Challenge Because a Company Does Not