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Lesson details
- Estimated study time
- 100 min
Learning objectives (3)
Cedar Trail sells a sensor with one year of defect coverage and offers an optional maintenance plan. If you place both promises in one “warranty reserve,” the rollforward is wrong before the first formula.
Scope first
Use the Topic 606 warranty evidence: separate sale, legal requirement, coverage length, tasks promised, and whether the customer receives service beyond assurance that the product complies with specifications. The case stipulates that standard defect coverage is assurance and the optional plan is a separate service. Only the assurance population enters this schedule.
Build the provision from observable drivers
For the supplied population, multiply covered units by expected claim incidence and expected cost per claim. Segment when product cohorts have materially different experience. Treat quality changes and January claims as evidence to evaluate, not as permission to backsolve a desired ending liability.
Keep the rollforward legible
| Movement | Meaning |
|---|---|
| Opening liability | Unsettled coverage from prior sales |
| Current provision | Expected cost of current covered sales |
| Estimate revision | New evidence about remaining obligations |
| Claims settled | Parts, labor, replacement, or cash consuming the liability |
| Ending liability | Remaining expected qualifying obligation |
The canonical schedule is $54,000 + $72,000 + $6,000 − $63,000 = $69,000. For this supplied evidence, current warranty expense is $78,000: the $72,000 provision plus the $6,000 upward revision. It is not the $63,000 of claims.
Hold claims at $63,000 and change only the evidence. With no revision, current expense would be $72,000 and ending liability $63,000. With a supported $9,000 downward revision, current expense would be $63,000 and ending liability $54,000. The claims did not choose expense; the current population estimate and revision evidence did.
Exit check
Explain how the same $63,000 claims total could coexist with higher, lower, or equal current expense. Name the evidence, not the desired balance, that would support each case.