P9-6 Defining and Analyzing Changes in Current Liabilities LO9-1 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 verify 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 $80,391 $79,939 $80,719 Standard warranty liability, end of year 134 168 172 Charges incurred during the year 139 181 180 Extended warranty deferred revenue, end of year 549 582 547 Revenue deferred for new extended warranty contracts 236 283 279 Required: 1. Compute the amount of warranty expense for 2017 and 2018. (Enter your answers in millions of dollars.) 2018 2017 Warranty expense 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.) View transaction list Journal entry worksheet Record to recognize the warranty expense for the year. Note: Enter debits before credits. Transaction General Journal Debit Credit A Record entry Clear entry View general journal 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.) View transaction list 1 Record to recognize the warranty expense for the year. > 2 Record to settlements made under the product warranty. Credit Note : = journal entry has been entered Record entry Clear entry View general journal 3-a. Compute the ratio of the warranty expense to net revenues for the three years. The Standard warranty liability had a balance of $197 at the beginning of 2016. (Round percentage answers to 2 decimal places (i.e., 0.1243 should be entered as 12.43).) 2018 2017 2016 Ratio of warranty expense to net revenues % % % 3-b. Has the ratio increased or decreased during the three-year period? (Enter your answers in millions of dollars.) The ratio from 2016 to 2017, and from 2017 to 2018. 4. Based on the limited information available about the warranty expense and settlements during these three years, should IBM reduce the ratio of the warranty expense to net sales in future years? Yes No 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.) View transaction list Journal entry worksheet Record to the recognize revenue related to extended warranties. Note: Enter debits before credits. Transaction General Journal Debit Credit A Record entry Clear entry View general journal