Reference no: EM132642618
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 10% return rate. However, effective October 1, 2020, because of a change in the manufacturing process, the rate increased to a total of 12%. 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 %of Total Returns
Following Expected
Sale in the Month
1st 20%
2nd 30%
3rd 20%
4th 10%
5th 10%
6th 10%
100%
For example. for Januarysales. 20%of the returns are expected in February. 30% in March. and soon. Salesof these batteries for the second half of 2020 were:
Month Sales Amount
July 51,700,000
August 1,600,000
September 2,200,000
October 1,400,000
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.
Problem 1: 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.
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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
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