Renew Energy Ltd. (REL) manufactures and sells directly to customers a special long-lasting rechargeable battery for use in digital electronic equipment. Each battery sold comes with a guarantee that the company will replace free of charge any battery that is found to be defective within six months from the end of the month in which the battery was sold. On June 30, 2017, the Warranty Liability account had a balance of $45,000, but by December 31, 2017, this amount had been reduced to $5,000 by charges for batteries returned.

REL has been in business for many years and has consistently experienced an 8% return rate. However, effective October 1, 2017, because of a change in the manufacturing process, the rate increased to a total of 10%. Each battery is stamped with a date at the time of sale so that REL has developed information on the likely pattern of returns during the six-month period, starting with the month following the sale. (Assume no batteries are returned in the month of sale.)

For example, for January sales, 20% of the returns are expected in February, 30% in March, and so on. Sales of these batteries for the second half of 2017 were:

REL's warranty also covers the payment of the freight cost on defective batteries returned and on new batteries sent as replacements. This freight cost is 10% of the sales price of the batteries returned. The manufacturing cost of a battery is roughly 60% of its sales price, and the salvage value of the returned batteries averages 14% of the sales price. Assume that REL follows IFRS and that it uses the expense approach to account for warranties.
Instructions
(a) Calculate the warranty expense that will be reported for the July 1 to December 31, 2017 period.
(b) Calculate the amount of the accrual that you would expect in the Warranty Liability account as at December 31, 2017, based on the above likely pattern of returns.
(c) Would your answer to any of the above situations change if REL followed ASPE?
(d) You are a potential investor reading REL's December 31, 2017 annual report, which was released on March 20, 2018. While reading the CEO's report, you find a description of plans to be implemented beginning April 1, 2018 that address REL's warranty policy and declining sales, which began October 1, 2017. An advertising agency has been hired that will help REL launch a new warranty policy. The new policy will extend the return period to 12 months and change the conditions of return to: "if for any reason the customer is dissatisfied with the product." Consequently, customers will no longer need to prove any product defect, allowing for faster returns and more satisfied customers. This change is expected to not only restore sales to the levels prior to the change in the product's manufacturing process, but also take sales away from REL's competitors. What additional disclosure, if any, are you expecting in the December 31, 2017 financial statements for this change in warranty policy taking effect on April 1, 2018?

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Month Following Sale 1st 2nd 3rd 4th 5th 6th % of Total Returns Expected in the Month 20% 30% 20% 10% 10% 10% 100% Month Sales Amount July August September October November December $1,800,000 1,650,000 2,050,000 1,425,000 1,000,000 900,000