1. Dell Inc. is a leading technology company that offers a broad range of product categories, including mobility products, desktop PCs, software and peripherals, servers and networking, and storage. Its annual report contained the following note:
Warranty— We record warranty liabilities at the time of sale for the estimated costs that may be incurred under the terms of the limited warranty. . . . The specific warranty terms and conditions vary depending upon the product sold and the country in which we do business, but generally include technical support, parts, and labor over a period ranging from one to three years. Factors that affect our 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 our warranty obligation.
Required:
Assume that estimated warranty costs for 2013 were $ 1 billion and that the warranty work was performed during 2014. Describe the financial statement effects for each year.
2. Walt Disney is a well- recognized brand in the entertainment industry, with products ranging from broadcast media to parks and resorts. The following note is from its annual report:
Walt Disney
Revenue Recognition
Revenues from advance theme park ticket sales are recognized when the tickets are used. For non- expiring, multi- year tickets, we recognize revenue over a three- year time period based on estimated usage, which is derived from historical usage patterns.
Required: Assume that Disney collected $ 120 million in 2013 for multi- year tickets that will be used in future years. For 2014, the company estimates that 70 percent of the tickets will be used, and the remaining 30 percent will be used in 2015. Describe the financial statement effects for each year.
Required:
Assume that Disney collected $ 120 million in 2013 for multi- year tickets that will be used in future years. For 2014, the company estimates that 70 percent of the tickets will be used, and the remaining 30 percent will be used in 2015. Describe the financial statement effects for each year.
3. Brunswick Corporation is a multinational company that manufactures and sells marine and recreational products. Its annual report contained the following information:
Litigation
A jury awarded $ 44.4 million in damages in a suit brought by Independent Boat Builders Inc., a buying group of boat manufacturers and its 22 members. Under the antitrust laws, the damage award has been tripled, and the plaintiffs will be entitled to their attorney’s fees and interest.
The Company has filed an appeal contending the verdict was erroneous as a matter of law, both as to liability and damages.
Required:
How should Brunswick report this litigation in its financial statements?
4. A recent annual report for Shoppers Drug Mart Corporation ( acquired by Loblaw Companies Limited in 2013) included quick assets of $ 574.2 million and current liabilities of $ 2,335 million. Based on the quick ratio, do you think that Shoppers Drug Mart is experiencing financial difficulty?
5. Alcoa is involved in the mining and manufacturing of aluminum. Its products can become an advanced alloy for the wing of a Boeing 787 or a common, recyclable Coca- Cola can. The annual report for Alcoa stated the following:
Environmental Expenditures
Liabilities are recorded when remediation costs are probable and the costs can be reasonably estimated.
Required:
In your own words, explain Alcoa’s accounting policy for environmental expenditures. What is the justification for this policy?