You are a sales manager for a company that sells computers. You earn an annual bonus based on revenue from the number of computers sold each year less related warranty expenses. Actual warranty expenses have varied over the prior five years from a high of 8% of a computer's selling price to a low of 4%. In the past, you have estimated warranty expense on the high end to be conservative. Once a year, you are required to work with the company's accountant to determine the warranty expense accrual for computers sold for the year.
Question 1: Does the warranty accrual decision create an ethical dilemma for you, the sales manager? Explain.
Question 2: Because the warranty expenses vary, what percentage would you choose for the current year? Justify your position.
Question 3: Present the journal entry the accountant would make to record the warranty accrual given your chosen percentage. Assume computer sales are $500,000 for the year.
Question 4: Assume several computers have warranty-covered repairs for a total repair cost of $25,000. Present the journal entry the accountant would make to record these repairs. Additionally, analyze whether your estimated warranty accrual (amount that you determined in Question 2 above) was sufficient to cover the expenditures. If not, explain what you would do to better estimate warranties in the future.