microsoft on tthursday extened the warrenty on its xbox 360 video game console a
ID: 2487066 • Letter: M
Question
microsoft on tthursday extened the warrenty on its xbox 360 video game console and said it will take a charge of more than 1 billion to pay for anticiapted costs under the new warrenty, microsoft will pay for shipping and repairs for 3 years worldwide, for consoles afflicted with what gamers call the red ring of death previously the warrenty expired after a year for US customers and 2 years for european, the charge will be 1.05 billion to 1.15 billion for the quarter ended june 30. microsoft reports its forth quarter results july 19
required
1. why must microsoft report his charge of over 1 billion entirely in one quarter, the last quarter of the companys fiscal year
2. when the annoucement was made, analyst richard doherty stated that either a high number of xbox 360s will fail or the company is being overely conservative in its warrenty estimate, from an accounting standpoint what will micerosoft do in the future if the estimate of future repairs is overly conservative (to high):?Summarize your findings. Cite relevant GAAP.
Explanation / Answer
1. Microsoft must take this charge of over $1 billion in the last quarter as as per matching principle, the expenses for warranty must be accounted in the same accoting period of revenue.
Microsoft has extended the warranty to three years, so there is additional warranty liability that needs to be accounted in the last quarter.
2.
If Micrsoft is over-conservative in liability estimate and the actual liability comes lower than that estimated, Microsoft can write back the additional warranty expense estimate through Income statement. For futrure warranty Liability estimates, Microsoft may revise the estimate and take the liability on the basis of observed trends of actual liability claim.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.