Question

Dell Inc. sells computer products as well as extended- warranty services on the products it sells, a common practice in the electronics industry. Should the product break down, Dell will provide repair services within its contractual obligations. More frequently, however, the product will function properly and no service is required. Dell initially defers revenue from selling extended warranties. Revenue from the sale of extended warranties is recognized gradually over the duration of the contracts or when the service is completed. Dell included the following note disclosures in a recent annual report:
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Standard Warranty Liabilities — Dell records warranty liabilities for its standard limited warranty at the time of sale for the estimated costs that may be incurred under its limited warranty. The liability for standard warranties is included in accrued and other current and other non- current liabilities on the Consolidated Statements of Financial Position. The specific warranty terms and conditions vary depending upon the product sold and the country in which Dell does business, but generally includes technical support, parts, and labor over a period ranging from one to three years. Factors that affect Dell’s warranty liability include the number of installed units currently under warranty, historical and anticipated rates of warranty claims on those units, and cost per claim to satisfy Dell’s warranty obligation. . . .
Deferred Revenue — Deferred revenue represents amounts received in advance for extended warranty services, amounts due or received from customers under a legally binding commitment prior to services being rendered, deferred revenue related to Dell- owned software offerings, as well as other deferred revenue. . . .
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Required:
1. Prepare the journal entries to record the transactions related to the changes to the warranty liability during fiscal year 2013.
2. Prepare the journal entries to record the transactions related to the changes to the deferred extended warranty revenue during fiscal year 2013.
3. Dell reported net revenues of $ 56,940, $ 62,071, and $ 61,494 for fiscal years 2013, 2012, and 2011, respectively. Compute the ratio of the warranty expense to net revenues for the three years. Has the ratio increased or decreased during the three- year period? Provide possible reasons for the changes in the ratio.
4. Based on the limited information available about the warranty expense and settlements during these three years, should Dell reduce the ratio of the warranty expense to net revenues in future years? Explain.


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  • CreatedAugust 04, 2015
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