International Business Machines IBM is a leading provider of
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 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 range up to three years, with the majority being either one or three years. Estimated costs for warranty terms standard to the deliverable are recognized when revenue is recorded for the related deliverable. The company estimates its warranty costs standard to the deliverable, based on historical warranty claim experience, and applies this estimate to the revenue stream for products under warranty.
In addition, IBM offers its customers an option to purchase extended warranties. Revenue from extended warranty contracts, for which the company is obligated to perform, is recorded as deferred revenue income and subsequently recognized on a straight- line basis over the delivery period. Selected information related to warranties provided by IBM follows (in millions of U. S. dollars):
1. Compute the amount of warranty expense for 2011 and 2012.
2. Prepare journal entries to record both the warranty expense for 2012 and the payments made under the warranty during the year.
3. Compute the ratio of the warranty expense to net revenues for the three years. Assume that the warranty expense is $ 477 for 2010. 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 IBM reduce the ratio of the warranty expense to net sales in future years? Explain.
5. Compute the extended warranty revenue recognized during 2011 and 2012, and prepare the journal entry to record the revenue recognized in 2012.
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