Accounting for warranties
The following note comes from a recent annual report for Sony Corporation:
Sony provides for the estimated cost of product warranties at the time revenue is recognized by either product category group or individual product. The product warranty is calculated based upon product sales, estimated probability of failure and estimated cost per claim. The variables used in the calculation of the provision are reviewed on a periodic basis.
Certain subsidiaries in the Electronics business offer extended warranty programs. The consideration received through extended warranty service is deferred and amortized on a straight-line basis over the term of the extended warranty.
Required
Based on this note, answer the following:
(a) How does Sony account for the product warranties? What would be the impact of the estimated cost of product warranties on each of the three principal financial statements?
(b) If Sony underestimates product warranties expense, how would it correct the error?
(c) How does Sony treat the extended warranty program at (a) time of sale, and (b) in subsequent periods? How would the accounting affect each of the three principal financial statements?
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