Question

Accrued Product Warranty

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

( in millions)
Year 2 Year 1
Current estimated product warranty payable $12,333 $11,824
Noncurrent estimated product warranty payable 7,501 6,611
Total $19,834 $18,435

Presume that Lachgar’s sales were $160,705 million in Year 2. Assume that the total paid on warranty claims during Year 2 was $12,714 million.

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

Feedback

Review the need for a classified balance sheet.

b. Provide the journal entry for the Year 2 product warranty expense.

Product Warranty Expense
Product Warranty Payable

Answer 1

A classified balance sheet is very important from all perspective. It is important from the perspective of the management, investors, share holders, creditors, banks, government authorities, etc. as it gives them meaningful information in a structured manner. A balance sheet consists of several items and classification helps organise the information in such a manner which is easy to comprehend.

In the given problem there is focus on classification of current and non current warranty payables, so let us take the same example and understand the importance of classification in current and non current warranty payables. If it was not classified in such a manner we would have got the total warranty payable figure of $19,384 in year 2, but this does not give a clear picture as to when this amount is due and payable. Generally payments due in short term makes a lot of importance as this is what company needs to shell out immediately. The creditors might be interested in this information since they are expecting payments from the company and a huge amount of such short term payable might be a risk for the creditors. Hence when we have a classified information it fulfills the need of different sections of users of information.

b. The warranty expense will be computed in year 2 as follows:

Particulars	Year 2	Year 1
Current estimated product warranty payable	12,333	11,824
Noncurrent estimated product warranty payable	7,501	6,611
	19,834	18,435
Add: Warranty expenses paid in Year 2	12,714
	32,548
Less: Opening balance of estimated Warranty payables	18,435
Warranty expenses for year 2	14,113

Journal Entry:

Product Warranty Expense Dr $14,113
Product Warranty Payable Cr $14,113