Question

Question Volvo Group reports the following information for its product warranty costs as of December 31, 2014,

along with provisions and utilizations of warranty liabilities for the year ended December 31, 2014 (SEK

in millions).

Provision for product warrantyWarranty provisions are estimated with consideration of historical claims

statistics, the warranty period, the average time-lag between faults occurring and claims to the company and

anticipated changes in quality indexes. Estimated costs for product warranties are recognized as cost of sales

when the products are sold . . . Differences between actual warranty claims and the estimated final claims

cost generally affect the recognized expense and provisions in future periods. Refunds from suppliers, that

decrease the Volvo Group’s warranty costs, are recognized to the extent these are considered to be certain.

Product warranty liabilities, December 31, 2013 SEK 9,881

Additional provisions to product warranty liabilities . 7,836

Utilizations and reductions of product warranty liabilities (7,134)

Product warranty liabilities, December 31, 2014 SEK 10,583

As of December 31, 2014 (2013), warranty cost provisions amount to 10,583 (9,881).

1. Prepare Volvo’s journal entry to record its estimated warranty liabilities (provisions) for 2014.

2. Prepare Volvo’s journal entry to record its costs (utilizations) related to its warranty program for 2014.

Assume those costs involve replacements taken out of inventory, with no cash involved.

3. How much warranty expense does Volvo report for 2014?

Short answer

Answer

1. The warranty liability is credited withSEK 7,706
2. The warranty cost is debited withSEK 6,677
3. The warranty expense for 2014 is $1,029

Step-by-step solution

Journal entries (1 and 2)

Date	Particulars	Debit	Credit
December 31, 2014	Warranty Expense	SEK 7,706
	Estimated Warranty Liability		SEK 7,706
	(To record the estimated warranty liability)
December 31, 2014	Estimated Warranty Liability	SEK 6,677
	Repairs Part Inventory		SEK 6,677
	(To record the cost of replacement)

Warranty Expense (3)

The warranty expense Volvo report for 2014:

$$\begin{gathered} \text{Warranty} \text{Expense} \text{=} \text{Estimsted} \text{Warranty -} \text{Cost} \text{of} \text{replacement} \\ \text{=} \text{SEK} \text{7,706 -} \text{SEK} \text{6,677} \\ \text{= SEK} \text{1,029} \end{gathered}$$