Question

Reformulating Financial Statements For Warranty Expense

Income statement data for Whirlpool Industries from the company’s 2016 financial statements follow. Use these data to reformulate the income statement for 2014, 2015, and 2016 under the assumption that warranty expense is a constant percentage of revenue across all three years. Specifically, compute the adjustments to: warranty expense, income tax expense, and net income. The company’s tax rate is 30%.

12 Months Ended ($ millions)		Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Net sales		$22,273	$22,446	$21,427
Warranty expense		281	525	287

Compute the average warranty expense to net sales rate over the past three years.

Round answer to two decimal places (ex: 0.02345 = 2.35%)

Answer%

Using your rounded answer, compute the adjusted warranty expense for each year.

Round answers to one decimal place.

Use a negative sign to indicate if the adjustment decreases an account balance.

Income Statements Adjustments			2016	2015	2014
Adjusted warranty expense			$Answer	$Answer	$Answer
Adjustment required to warranty expense			Answer	Answer	Answer
Income tax expense			Answer	Answer	Answer
Net Income			Answer	Answer	Answer

Answer 1

12 Months Ended ($ millions)		Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Net sales		$22,273	$22,446	$21,427
Warranty expense		281	525	287

Warranty Expense Rate = Warranty expense/Net sales * 100

2016 = 281/22273 * 100 = 1.26%

2015 = 525/22446 * 100 = 2.34%

2014 = 287/21427 * 100 = 1.34%

So, average warranty expense = (1.26+2.34+1.34)/3 = 1.65%

Now, following are the income tax adjustments:-

Income Statements Adj	2016	2015	2014
Adjusted warranty expense	22273 * 1.65% = 368	22446 * 1.65% = 370	21427 * 1.65% = 354
Adjustment required	368-281 = 87	370-525 = -155	354-287 = 67
Income tax Expense	87 * 30% = 26.1	-155 * 30% = -46.5	67 * 30% = 20.1
Net Income	-113.1 (87 + 26.1)	201.5 (155+46.5)	-87.1 (67+20.1)