Cool Sound Ltd. manufactures a line of amplifiers that carry a three-year warranty against defects. Based on experience, the estimated warranty costs related to dollar sales are as follows: first year after sale—2% of sales; second year after sale—3% of sales; and third year after sale —4% of sales. Sales and actual warranty expenditures for the first three years of business were: 

Instructions 

a. Calculate the amount that Cool Sound Ltd. should report as warranty expense on its 2020 income statement and as a warranty liability on its December 31, 2020 SFP using the assurance-type warranty (expense-based approach). Assume that all sales are made evenly throughout each year and that warranty expenditures are also evenly spaced according to the rates above. 

b. Are assurance-type warranties recorded differently in IFRS and ASPE? 

c. Assume that Cool Sound's warranty expenditures in the first year after sale end up being 4% of sales, which is twice as much as was forecast. How would management account for this change? 

d. Describe how data analytics could help Cool Sound reduce future uncertainty concerning estimating warranty expenses.

Transcribed Image Text:

Sales Warranty Expenditures 2018 $ 810,000 $16,500 2019 1,070,000 47,200 2020 1,036,000 83,000