Question

General Motors Corporation (GM0 disclosed estimated product warranty payable for comparative years as follows:

year 2 year 1

Current estimated product warranty payable $2,788. $2,994

Noncurrent estimated product warranty payable. 4,802. 5,338

Total $7,590. $8,332

Presume that GM's sales were $147,049 million in year 2 and that the total paid on warranty claims during year 2 was 3,000 million.

a. why are short- and long term estimated warranty liabilities disclosed seprately?

b. provide the journal entry for year 2 product warranty expense.

c. what two conditions must be met in order for the product warranty liability to be reported on the finanical statement?

Answer 1

a. The short term and long term liabilities are disclosed separately for the creditors so as to accurately evaluate the near term cash demands on the business related to the quick current assets and other longer duration demands.

b. Journal entry

Product Warranty expense ($7590-($8332-$3000)) $2,258,000,000

Product warannty payable $2,258,000,000

c. Two conditions:

i) It is probable that liability will occur during the warannty period.

ii) The expenditure amount to  be recognized on such warannty claims can be reliably estimated.

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