(in millions)
Year 2 Year 1
Current estimated product warranty payable $2,587 $2,965
Noncurrent estimated product warranty payable 4,202 4,065
Total $6,789 $7,030
GM’s sales were $135,592 million in Year 2. Assume that the total paid on warranty claims during Year 2 was $3,000 million.
a. Why are short- and long-term estimated warranty liabilities separately disclosed?
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:
a. The warranty liability represents estimated outstanding automobile warranty claims. Of these claims, $2,965 million is estimated to be due during Year 2, while the remainder ($4,065 million) is expected to be paid after Year 2. 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.
b.
Product Warranty Expense 2,759,000,000
Product Warranty Payable 2,759,000,000
$7,030 + X – $3,000 = $6,789
X = $6,789 – $7,030 + $3,000
X = $2,759 million
c. In order for a product warranty to be reported as a liability in the financial statements, it must qualify as a contingent liability. Contingent liabilities are only reported as liabilities on the balance sheet if it is probable that the liability will occur and the amount of the liability is reasonably estimable .