Renew Energy Ltd. (REL) manufactures and sells directly to customers a special long-lasting rechargeable battery for use in digital electronic equipment. Each battery sold comes with a guarantee that the company will replace free of charge any battery that is found to be defective within six months from the end of the month in which the battery was sold. On June 30, 2020, the Warranty Liability account had a balance of $45,000, but by December 31, 2020, this amount had been reduced to $5,000 by charges for batteries returned.

REL has been in business for many years and has consistently experienced an 7% return rate. However, effective October 1, 2020, because of a change in the manufacturing process, the rate increased to a total of 9%. Each battery is stamped with a date at the time of sale so that REL has developed information on the likely pattern of returns during the six-month period, starting with the month following the sale. (Assume no batteries are returned in the month of sale.)

Month Following Sale		% of Total Returns Expected in the Month
1st			20%
2nd			30%
3rd			20%
4th			10%
5th			10%
6th			10%
			100%

For example, for January sales, 20% of the returns are expected in February, 30% in March, and so on. Sales of these batteries for the second half of 2020 were:

Month		Sales Amount
July		$1,700,000
August		1,700,000
September		2,200,000
October		1,300,000
November		1,000,000
December		800,000

REL’s warranty also covers the payment of the freight cost on defective batteries returned and on new batteries sent as replacements. This freight cost is 10% of the sales price of the batteries returned. The manufacturing cost of a battery is roughly 60% of its sales price, and the salvage value of the returned batteries averages 14% of the sales price. Assume that REL follows IFRS and that it uses the expense approach to account for warranties.

Calculate the warranty expense that will be reported for the July 1 to December 31, 2020 period.

Warranty Expense

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Calculate the amount of the accrual that you would expect in the Warranty Liability account as at December 31, 2020, based on the above likely pattern of returns.

Provision in the Warranty Liability account

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Would your answer to any of the above situations change if REL followed ASPE?

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Answer rating: 100% (QA)

Calculation of expected return for respective month Month Sales Expected return July 1700000 7 11900... View the full answer