Analyzing Contingent Liabilities: Warranty Reserves Headquartered in Montreal, Quebec, Canada, Bombardier Inc. is a multinational aerospace and transportation company, founded in 1941. The company manufactures regional aircraft, business jets, mass transportation equipment, and recreational equipment and is also a financial services provider.

Bombardier is a Fortune Global 500 company and operates two segments: BA (Aerospace) and BT

(Transportation). Bombardier’s 2015 annual report includes the following details about the company’s warranty reserve.

Balance as at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $773 Additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360 Utilization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (244)

Reversals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (118)

Accretion expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Effect of changes in discount rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1)

Effect of foreign currency exchange rate changes. . . . . . . . . . . . . . . . . . . . (46)

Balance as at December 31, 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $725 Of which current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $562 Of which non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163

$725 Required

a. In common language, explain what is a warranty reserve. When do companies create such reserves?

b. What amount is included on the 2015 balance sheet for warranty reserve?

c. What amount is included on the 2015 income statement related to warranties?

d. What is meant by “Utilization” in the table? What sort of costs does this entail?