Product warranty expense impact on the financial statements

Ford Motor Company (F) disclosed the following estimated Product warranty payable for two recent years. December 31, Year 2 Year 1 (in millions) Product warranty payable $5,702 $5,137 Ford's sales in its automotive sector were $143,599 million in Year 2 and $148,294 million in Year 1. Assume that the total paid on warranty claims during Year 2 was $4,360 million. a. Illustrate the effects on the accounts and financial statements for the Year 2 product warranty expense. If no account or activity is affected, select "No effect" from the dropdown list and leave the corresponding number entry box blank. Enter account decreases, cash outflows, and the income statement effects that decrease net income as negative amounts. Enter amounts in millions.

To illustrate the effects on the accounts and financial statements for Year 2 product warranty expense, we need to follow these steps:

1. Calculate the warranty expense for Year 2:

   • The formula to calculate the warranty expense is: $$\text{Warranty Expense} = (\text{Ending Warranty Payable} - \text{Beginning Warranty Payable}) + \text{Warranty Claims Paid}$$
   • Using the given data: $$\text{Warranty Expense} = (5,702 - 5,137) + 4,360 = 565 + 4,360 = 4,925 \text{ million}$$

2. Effects on accounts and financial statements:

   • Warranty Expense (Income Statement): This will increase by $4,925 million.
   • Warranty Payable (Balance Sheet): This will increase by $565 million.
   • Cash (Balance Sheet): This will decrease by the amount paid on warranty claims, $4,360 million.

Here's how these effects will be presented:

Effects on Financial Statements for Year 2

Income Statement

• Warranty Expense: Increase by $-4,925$ million (this represents an expense and thus reduces net income)

Balance Sheet

• Warranty Payable: Increase by $565$ million
• Cash: Decrease by $-4,360$ million

Detailed Entries

1. Warranty Expense (Income Statement):

   • Account: Warranty Expense
   • Effect: $-4,925$ million

2. Warranty Payable (Balance Sheet):

   • Account: Warranty Payable
   • Effect: $565$ million

3. Cash (Balance Sheet):

   • Account: Cash
   • Effect: $-4,360$ million

Summary of Effects on Financial Statements

• Income Statement:

  • Warranty Expense: $-4,925$ million (decreases net income)

• Balance Sheet:

  • Warranty Payable: $565$ million (liability increase)
  • Cash: $-4,360$ million (asset decrease)

By illustrating these effects, we have a clear picture of how the Year 2 product warranty expense impacts the financial statements of Ford Motor Company.