Volvo Group reports the following information for its product warranty costs as of December 31, 2008, along with provisions and utilizations of warranty liabilities for the year ended December 31, 2008 (SEK in millions).
Product warranty costs
Estimated costs for product warranties are charged to cost of sales when the products are sold. Estimated warranty costs include contractual warranty and goodwill warranty. Warranty 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. Differences between actual warranty claims and the estimated claims generally affect the recognized expense and provisions in future periods. At December 31, 2008, warranty cost provisions amounted to 10,354.
Product warranty liabilities, December 31, 2007 | SEK 9,373 |
Additional provisions to product warranty liabilities | 6,201 |
Utilizations and reductions of product warranty liabilities | (5,220) |
Product warranty liabilities, December 31, 2008 | 10,354 |
1. Prepare Volvo’s journal entry to record its estimated warranty liabilities (provisions) for 2008.
2. Prepare Volvo’s journal entry to record its costs (utilizations) related to its warranty program for 2008. Assume those costs involve replacements taken out of Inventory, with no cash involved.
3. How much warranty expense does Volvo report for 2008?
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