P8-6 (Algo) Defining and Analyzing Changes in Current Liabilities LO8-1 International Business Machines (IBM) is a leading provider of computer products and services. The company is known for its hardware products but has focused on providing information technology services in recent years. IBM provides standard warranties and extended warranties with the sale of its products. The company's note on significant accounting policies is as follows: The company offers warranties for its hardware products that generally range up to three years, with the majority being either one or three years. Any cost of standard warranties is accrued when the corresponding revenue is recognized. The company estimates its standard warranty costs for products based on historical warranty claim experience and estimates of future spending and applies this estimate to the revenue stream for products under warranty. Estimated future costs for warranties applicable to revenue recognized in the current period are charged to cost of sales. The warranty liability is reviewed quarterly to verify that it properly reflects the remaining obligation based on the anticipated expenditures over the balance of the obligation period. Adjustments are made when actual warranty claim experience differs from estimates. Costs from fixed-price support or maintenance contracts, including extended warranty contracts, are recognized as incurred. Revenue from extended warranty contracts is initially recorded as deferred income and subsequently recognized on a straight-line basis over the delivery period because the company is providing a service of standing ready to provide services over such term. Selected information related to warranties provided by IBM follows (in millions of U.S. dollars): Net revenues Standard warranty liability, end of year Charges incurred during the year 2021 2020 2019 $59,000 $58,329 $60,334 87 93 123 (96) (106) (125) 435 176 Extended warranty deferred revenue, end of year Revenue deferred for new extended warranty contracts 360 143 Required: 487 208 Compute the amount of warranty expense for 2020 and 2021. (Enter your answers in millions of dollars.) Warranty expense 2021 2020 2. Prepare journal entries to record both the warranty expense for 2021 and the payments made under the warranty during the year. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions of dollars.) View transaction list