You have obtained the following extract from the financial statements of a leading computer manufacturer. The aggregate product warranty liabilities were as follows for the following fiscal years ended October 31. In the year of 2012, product warranty liability at the beginning of year is $2,451. In the year of 2012, accruals for warranties issued are $2,370. In the year of 2012, settlements made for warranties are $2,251. In the year of 2012, product warranty liability at the end of year is $2,570. In the year of 2011, product warranty liability at the beginning of year is $2,447. In the year of 2011, accruals for warranties issued are $2,624. In the year of 2011, settlements made for warranties are $2,620. In the year of 2011, product warranty liability at the end of year is $2,451.

1. Based on the above information, how much of the company’s economic resources were used in 2012 to honour its products under warranty?

2. Assume you are the auditor of the company and have reliably measured the total revenues of the company as $75,000 in the year of 2012. Historically, the company has reported an average warranty expense of 3% of total revenues. If the 3% figure is correct, by how much has the company overstated or understated its warranty expense for the year ended October 31, 2012?

Answer rating: 100% (QA)

1 In the year 2012 the accrual for warranty expense was 2370 Though it was the warranty expens... View the full answer