Inline Incorporated manufactures skates and equipment for in-line skating. The c
ID: 2486297 • Letter: I
Question
Inline Incorporated manufactures skates and equipment for in-line skating. The company offers a one-year warranty on all products. During 2012, the company recorded net sales of $3,887.4 million. Historically, about 3% of all sales are returned under warranty and the cost of repairing and or replacing goods under warranty is about 60% of retail value. Assume that at the start of the year Inline’s balance sheet included an accrued warranty liability of $18.9 million and at the end of the year, the accrued warranty liability balance was $14.0 million. a. How should Inline account for warranty claims? b. Calculate Inline’s warranty expense for 2012. c. How much did Inline pay during the year to repair and or replace goods under warranty?
Explanation / Answer
a-Inline should record the estimated cost of product warranties at the time sales are recognized. To do this, the company should estimate warranty obligation by reference to historical product warranty return rates, material usage and service delivery costs incurred in correcting the product. Should actual product warranty return rates, material usage or service delivery costs differ from the historical rates, Inline should revise its warranty liability
b. Warranty expense for 2012 = 3887.4*3%*60% = 69.9732 million
c-accrued liability + current year liability - closing balance of accrued liability
= 18.9+69.9732 - 14 = 74.8732 million