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P9-6 Defining and Analyzing Changes in Current Liabilities L09-1 International Business Machines (IBM) is a leading provider of computer products and services. The company is known for its hardware products but has focused on providing information technology services in recent years. IBM provides standard warranties and extended warranties with the sale of its products. The company's note on significant accounting policies is as follows: The company offers warranties for its hardware products that generally range up to three years, with the majority being either one or three years. Estimated costs for standard warranty terms are recognized when revenue is recorded for the related product. The company estimates its warranty costs standard to the product based on historical warranty claim experience and estimates of future spending, and applies this estimate to the revenue stream for products under warranty. Estimated future costs for warranties applicable to revenue recognized in the current period are charged to cost of sales. The warranty liability is reviewed quarterly to verity that it properly reflects the remaining obligation based on the anticipated expenditures over the balance of the obligation period. Revenue from extended warranty contracts is initially recorded as deferred income and subsequently recognized on a straight-line basis over the delivery period because the company is providing a service of standing ready to provide services over such term Selected information related to warranties provided by IBM follows (in millions of U.S. dollars): 2018 2017 2016 Net revenues $80,491 580,039 $80,819 Standard warranty liability, and of year 136 170 174 Charges incurred during the year 141 183 182 Extended warranty deferred revenue, end of year 584 549 Revenue deferred for new extended warranty contracts 238 285 281 551 Required: 1. Compute the amount of warranty expense for 2017 and 2018. (Enter your answers in millions of dollars.) Answer is complete and correct. 2018 2017 Warranty expense 107s 179 2. Prepare journal entries to record both the warranty expense for 2018 and the payments made under the warranty during the year. (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.) Answer is complete and correct. No Credit General Journal Transaction Debit 107 1 Warranty expense Estimated warranty lability 107 2 B 141 Estimated warranty liability Cash 141 5-a. Compute the extended warranty revenue recognized during 2017 and 2018. (Enter your answers in millions of dollars.) 2018 2017 Extended Warranty revenue 5-b. Prepare the Journal entry to record the revenue recognized in 2018. (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.) Answer is not complete. No Transaction General Journal Debit Credit
