Question
Orange Co. manufactures luxury watches. The company is known for the quality of its products and offers one of the best warranties in the industry
Orange Co. manufactures luxury watches. The company is known for the quality of its products and offers one of the best warranties in the industry on its higher-priced productsa lifetime guarantee, performing all the warranty work in its own shops. The warranty on these products is included in the sales price. Due to the recent introduction and growth in sales of some products targeted to the low-price market, Orange is considering partnering with another company to do the warranty work on this line of products, if customers purchase a service contract at the time of original product purchase. How do you think Orange should account for this new warranty arrangement?
(a) Identify the accounting standards that addresses the accounting for the type of separately priced warranty that Orange is considering.
(b) When are warranty contracts considered separately priced?
(c) What are incremental direct acquisition costs and how should they be treated?
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