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A product warranty is a promise made by a seller to a buyer to warrant the product against defect for some period of time. From an accounting perspective, a warranty is an example of a probable contingent liability. This means we will record a journal entry to record the warranty liability before the actual warranty claims happen. This is also an estimated liability, because we dont know exactly how many units will require warranty work. We estimate the expense and liability and record it in the same period as the sale. This adheres to the matching principle, which we learned about earlier. So lets look at an example. Arcade Fire sells 10,000 CDs at an average price of $10 each. The selling price includes a one-year warranty against disk defect. Arcade Fire expects that 500 units (5%) will be defective and that the warranty repair cost will average about $8 per unit. In 2015 the company honors warranty contracts on 300 units, at a total cost of $2,400. So lets compute the wa