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 16,968 18,547 18,092 Provision for product warranties at year-end 1,006 1,113 1,160 During fiscal year 2015, Bombardier paid $405 million to customers in exchange for returned products under the warranty.

Required: 1. Compute the amount of warranty expense for fiscal year 2015. (Enter your answer in millions of dollars.)

2. Prepare journal entries to record both the warranty expense for the year and the payments made under the warranty. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions of dollars.)

• Record payments to customers in exchange for returned products.
• Record entry to recognize warranty expense for the period.

3-a. Compute the ratio of the warranty liability to revenues for the three years. (Round percentage answers to 2 decimal places (i.e., 0.1243 should be entered as 12.43).)

3-b. 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? Yes No

Answer 1

1. Warranty Expense = $1006 - 1113 + 405 = $298 millions

2.

Account Titles	Debit	Credit
Warranty Expense	$                298
Provision for Product Warranties		$                  298
(To record warranty expense)
Provision for Product Warranties	$                405
Cash		$                  405
(To record payment of returned products)

3-a

	2015	2014	2013
Revenues	$          16,968	$            18,547	$      18,092
Provision for Product Warranties	$             1,006	$              1,113	$         1,160
Ratio	5.93%	6.00%	6.41%

3-b Ratio has decreased during the three year period

4.
Yes, balance of warranty liability should be increased since payment for warranty was higher than warranty expense