Question

Lachgar Industries disclosed estimated product warranty payable for comparative years as follows:

	( in millions)
	Year 2		Year 1
Current estimated product warranty payable	$12,671		$12,149
Noncurrent estimated product warranty payable	7,707		6,793
Total	$20,378		$18,942

Presume that Lachgar’s sales were $165,116 million in Year 2. Assume that the total paid on warranty claims during Year 2 was $13,063 million.

a. The distinction between short- and long-term liabilities is important to creditors in order to accurately evaluate the near-term cash on the business relative to the quick current assets and other longer-term .

b. Provide the journal entry for the Year 2 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 1

Part a

Noncurrent liabilities, also called long-term liabilities, are debts not anticipated to be extinguished within the 12 months following the date of the balance sheet. If an entity’s operating cycle is longer than 12 months, a noncurrent liability is an obligation not expected to be extinguished in one operating cycle.

Current liabilities, also called Short-term liabilities, are debts which are anticipated to be extinguished within the 12 months following the date of the balance sheet.

Part b - journal entry

Part c

1. Amount can be estimated

2. It is probable that customers will be making claims under the warranty