You are the newly hired lead staff accountant at a new, but rapidly growing, firm that manufacturers components for wireless routers. The firm provides a quality-assurance warranty (manufacturers warranty) on all of its products.

You are in the midst of supervising the accounting departments preparation of year-end financial statements, when the Chief Financial Officer (CFO) of the firm requests that you come to his office, and that you must bring with you the preliminary report for year-end adjusting entries.

The CFO is asking that you reconsider one of the adjusting entries that gives rise to an estimated expense on the income statement:

The CFO: Dont you think that 3.5% of sales is a little high for our warranty expense estimate? After all, were new at this. We have little experience with product introductions. I just got off the phone with the CEO and she thinks well have trouble renewing our credit line with the profits were projecting. The pressures on.

You: I will have a look again at the 3.5% estimated percentage of future warranty claims, whether that is an appropriate estimate to use, and will get back with you.

________________________________________________________________________________________

Required: Write a professional memo to the CFO that addresses this conversation that you had with him. Please choose and use a Memo template in MS Word. To receive full credit on this case assignment, your memo must include the following:

• A summary of the accounting for estimated warranty expense under accrual basis accounting (e.g. consider the adjusting entries and future related entries associated with accruing for warranty expense and then state the impact on the financial statements for both when the adjusting entry is made, and later when claims are filed)
• Your answer as to whether the accounting department should reduce the estimated percentage of future warranty claims
• Identification of whether a potential ethical dilemma exists
• Discussion of who would be affected if the warranty percentage is changed (be sure to robustly consider all constituents involved, and both the potential of short-term and long-term effects/risks that significantly changing this percentage could have)