Every new iPhone comes with a basic one-year warranty. If defects in materials or workmanship are discovered within one year from the date of retail purchase, Apple will repair or replace the iPhone at no cost to the customer. Recently, a batch of iPhone 6s devices were found to have a defect that causes them to turn off unexpectedly when the battery charge level reaches approximately 30%. Apple has published a battery replacement program for these iPhone 6s devices.

Questions

1. Suppose Apple makes a quarterly adjusting entry using the percentage of sales method to estimate the warranty expense for all new iPhones sold during the quarter. How will this adjusting entry affect Apple's balance sheet? Your income statement?

2. Is the adjustment entry for warranty expense an accrual or a deferral? Explain.

3. Now think about the battery replacement program for the affected iPhone 6s devices. When a customer brings their iPhone 6s in for a battery replacement under the battery replacement program, how will this transaction affect Apple's bottom line? Your income statement?

Answer rating: 100% (QA)

The adjusting entry for warranty expense using the percentage of sales method will affect Apples bal... View the full answer