All Brony’s Bikes products are sold under a one-year warranty covering all parts and labor. Repairs are performed locally, either by the dealer who sold the bicycle or by local entities licensed as official Brony’s Bikes bicycle repair shops. Brony’s Bikes reimburses the dealers and shops for labor and parts. Reimbursement is based on work orders submitted by the repairing agency. The customer signs the work orders, and the serial number of the product repaired also appears on each work order. Defective parts or products replaced must be returned to Brony’s Bikes with the accompanying work order. The parts and products are received and logged in on color-coded receiving reports designed for returns.

Ignore the current deferred income tax liability arising from the difference between book warranty expense and warranty expense for income tax purpose. In this case, the deferred income tax liability account will not be adjusted.

At the end of each month, the following standard journal entry is posted as an adjustment to estimated product warranty.

Debit 8330 Product Warranty Expense

Credit 2070 Estimated Product Warranty Liability

For 20X9, the company applied 0.5% to cost of goods sold in determining the amount of the monthly adjustment. Debits to account 2070 are for reimbursements and for product and parts replacements. Defective parts and products are “zero valued” and placed in the rework department.

Derick has asked you to analyze product warranty and determine the appropriate balance in the 20X9 liability account. He has already provided you with partially completed WP 20 contained in file named 20X9 warranty.xlxs and a client-prepared analysis of returns over the past four years. In order to perform the analysis Derick has requested you must complete the calculations in WP 20 to determine whether an audit adjustment should be made. There are several formula errors in WP 20. If you correctly complete WP 20 those errors and the correct adjusted cost of goods sold account will be replaced by the computed values you need to determine whether the Estimated Warranty Liability and related Warranty Expense require adjustments. See file MUS for Audit Adjustment #1 and file cutoff for Audit Adjustment #3.

Requirements

1.  Using Excel download the file labeled “20X9 Warranty.xlxs.” Examine the document carefully and comment on its adequacy and completeness. (Note that the 12/31/X8 audited balances appear to be unreasonable because you have not yet selected an appropriate provision percentage based on the “data from client-prepared analysis of warranty claims.”)

2. Scroll to the bottom of WP 20 and enter audit adjustments already made in previous modules that affect cost of goods sold for 20X9. You should identify the following adjustments.

3. Enter equations in cells C44, D44, and E44 that will calculate the percentage of warranty claims to cost of goods sold for each of the three years 20X6–20X8.

4. Note the percentage that now appears in cell B46 and the resulting adjustment to product warranty expense.

5.  What comprises the documentation examined by the auditor (audit legend E) supporting the debits to account 2070?

6. How would you audit the client-prepared analysis of warranty claims? (See “Year of Claim/Year of Sale” analysis in the middle of WP 20.)

7. Draft AJE No. 12 on the document.

8.  Shelly Ross, the other assistant auditor on the engagement, asks why you didn’t adjust the prior years under provision through beginning retained earnings. What is your response?

Answer rating: 100% (QA)

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