Question

Bombardier Inc. specializes in manufacturing transportation products (aircraft, railway equipment, snowmobiles, and watercraft). The company offers warranties on all of its products. Note 2 to Bombardier’s financial statements for fiscal year 2015 stated the following:

Product warranties typically range from one to five years, except for aircraft and bogie structural warranties that extend up to 20 years.

Selected information from Bombardier’s annual reports follows (amounts in millions of U.S. dollars):

		2015		2014		2013
Revenues		18,172		20,111		18,151
Provision for product warranties at year-end		725		773		863

During the fiscal year 2015, Bombardier paid $224 million to customers in exchange for returned products under the warranty.

Required:

1. Compute the amount of warranty expense for fiscal year 2015.

2. Prepare journal entries to record both the warranty expense for the year and the payments made under the warranty.

3. Compute the ratio of the warranty liability to revenues for the three years. Has the ratio increased or decreased during the three-year period?

4. Based on the limited information available about the warranty expense and payments in 2015, should Bombardier increase the balance of the warranty liability in future years? Explain.

Answer 1

Answer :