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The two types of warranties in a contract of sale are assurance and service warranties. An assurance warranty is a potential cost, while a service warranty is a distinct performance obligation that can be bought separately. You allocate a transaction price to distinct performance obligations, with assurance warranties being treated as just a cost provision. For example, a standard one-year warranty is an assurance warranty, while a two-year warranty is a service warranty. Expenses are debited and provisioned for the expected cost of the service warranty.
