As you are probably aware, Research in Motion Inc. (RIM) is the Canadian company that developed the BlackBerry communications device. Note 13 to RIM's 2010 financial statements, which appears in Exhibit 9-8, along with the revenue figures from the income statement:
Required:
a. Based on the note, how much was the warranty expense that was originally recorded in fiscal 2010? How much was the liability on the balance sheet at the end of the same fiscal year?
b. Warranty obligations are based on estimates, and when management revises the estimate they adjust the current year's expense. What was the effect on BIM's warranty expense and the warranty liability as a result of the changes in estimates made in fiscal 2010 and in 2009?
c. Calculate the ratio of the warranty expense to the revenue for each of the three years presented. Assume that the warranties are only related to revenues generated from devices and not from services provided, and ignore the change in estimates in determining the expense. Comment on your findings.
d. Explain how it would be possible for RIM's management to manage its earnings using warranty estimates.