Entity A manufactures and sells electronic goods. One particular product, Product X, is sold with a six-month manufacturer’s warranty. Entity A also offers customers the option to purchase an extended warranty on Product X. Under the extended warranty, Entity A will repair products that become defective within 24 months from the date the manufacturer’s warranty ends. Product X is sold for €640 per unit. A customer can purchase Product X plus the extended warranty at a combined price of €720. Entity A’s financial year ends on 31 December. As at 31 December 20X6, Entity A estimates, based on its past experience and the number of units of Product X sold in 20X6, that costs of €20,000 will be incurred to repair products that become defective within six months of their sale.

Required: 

(a) Explain how the sale of Product X plus the related warranties should be accounted for in the financial statements of Entity A.

(b) IFRS 15 identifies two types of warranties: 

(i) Service-type warranties and 

(ii) Assurance-type warranties. Distinguish between the two types of warranties and briefly outline the accounting treatment specified for each warranty type.

(c) Identify and explain the factors that should be considered in assessing whether a warranty provides a customer with a service in addition to the assurance that the product complies with agreed specifications.