Question

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 Following Sale 1st 2nd 3rd 4th 5th 6th % of Total Returns Expected in the Month 20% 30% 20% 1096 1096 1096 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 July August September October November December Sales Amount $1,700,000 1,600,000 2.200.000 1,400,000 1,000,000 800,000 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.

Answer 1

Calculation of sale price of batteries expected to be returned Month Sales Return Rate Return Amount July $ 1,700,000 10% $ 170,000 August $ 1,600,000 10% $ 160,000 September $ 2,200,000 10% $ 220,000 October $ 1,400,000 12% $ 168,000 November $ 1,000,000 12% $ 120,000 December $ 800,000 12% $ 96,000 $ 934,000 Estimated cost of replacemt for batteries related to July - December 2020 Manufacturing Cost of a Battery 60% of Sale Price Freight Cost of a Battery 10% of Sale Price Less: Salvage Value of the returned Battery 14% of Sale Price Cost of replacement to Battery 56% of Sale Price Estimated cost of replacemt for batteries related to July - December 2020 $934,000 * 56% $ 523,040 Less: Adjustment $ (5,000.00) Estimated total cost (Warranty Expenses) $ 518,040 #1 #2 Amount of Provision required in Warranty Liability account as at December 31, 20 % remained to Provision Required be returned as (Warranty Expense Expected Return Warranty Expense at December % remained to be Amount @56% of Sale Price 31, 2020 returned) $ 170,000 $ 95,200 10% $ 9,520 $ 160,000 $ 89,600 20% $ 17,920 $ 220,000 $ 123,200 30% $ 36,960 $ 168,000 $ 94,080 50% $ 47,040 $ 120,000 $ 67,200 80% $ 53,760 $ 96,000 $ 53,760 100% $ 53,760 $ 934,000 $ 523,040 $ 218,960 Note: In the given pattern of return, For July sales - 20% of returns are expected in August, 30% in September, 20% in October, 10% in November, 10% in December Total 90% of July returns are returned as at December and remaining 10% remained to be returned. And Calculate further months like this. Note: Please Comment down for any further clarifications.