EX 11-20 Accrued product warranty
General Motors Corporation disclosed estimated product warranty payable for comparative years as follows:
(in millions) 12/31/08 12/31/07 Current estimated product warranty payable $3,792 $4,655 Noncurrent estimated product warranty payable 4,699 4,960 Total $8,491 $9,615
GM’s sales were $177,594 million in 2007 and decreased to $147,732 million in 2008. Assume that the total paid on warranty claims during 2008 was $5,000 million.
a. Why are short- and long-term estimated warranty liabilities separately disclosed?
b. Provide the journal entry for the 2008 product warranty expense.
c. What two conditions must be met in order for a product warranty liability to be reported in the financial statements?
Answer:
a. The warranty liability represents estimated outstanding automobile warranty claims. Of these claims, $3,792 million is estimated to be due during 2009, while the remainder ($4,699 million) is expected to be paid after 2009. The distinction between short- and long-term liabilities is important to creditors in order to accurately evaluate the near-term cash demands on the business, relative to the quick current assets and other longer-term demands.
b. Product Warranty Expense........................... 3,876,000,000 Product Warranty Payable....................... 3,876,000,000 $9,615 + X – $5,000 = $8,491 X = $8,491 – $9,615 + $5,000 X = $3,876 million
c. In order for a product warranty to be reported as a liability in the financial statements, it must qualify as a contingent liability. Contingent liabilities are only reported as liabilities on the balance sheet if it is probable that the liability will occur and the amount of the liability is reasonably estimable.
(in millions) 12/31/08 12/31/07 Current estimated product warranty payable $3,792 $4,655 Noncurrent estimated product warranty payable 4,699 4,960 Total $8,491 $9,615
GM’s sales were $177,594 million in 2007 and decreased to $147,732 million in 2008. Assume that the total paid on warranty claims during 2008 was $5,000 million.
a. Why are short- and long-term estimated warranty liabilities separately disclosed?
b. Provide the journal entry for the 2008 product warranty expense.
c. What two conditions must be met in order for a product warranty liability to be reported in the financial statements?
Answer:
a. The warranty liability represents estimated outstanding automobile warranty claims. Of these claims, $3,792 million is estimated to be due during 2009, while the remainder ($4,699 million) is expected to be paid after 2009. The distinction between short- and long-term liabilities is important to creditors in order to accurately evaluate the near-term cash demands on the business, relative to the quick current assets and other longer-term demands.
b. Product Warranty Expense........................... 3,876,000,000 Product Warranty Payable....................... 3,876,000,000 $9,615 + X – $5,000 = $8,491 X = $8,491 – $9,615 + $5,000 X = $3,876 million
c. In order for a product warranty to be reported as a liability in the financial statements, it must qualify as a contingent liability. Contingent liabilities are only reported as liabilities on the balance sheet if it is probable that the liability will occur and the amount of the liability is reasonably estimable.
