Reference no: EM132953239
Do you own an iPhone? Did you own one a few years ago? Did your iPhone ever suddenly power off or did you later feel like your iPhone performance slowed way down following an iOS update? If you answered yes to any of these questions you may be familiar with the "Batterygate" scandal that has unfolded for Apple over the past several years. When iPhone batteries were not performing up to par, Apple tried to slap a software solution (an iOS update) on a hardware issue; they purposefully slowed down iPhones with the update to attempt to make the old battery not cause the iPhone to crash. Long story short, many people thought they needed to buy an entire new iPhone, when they really just needed a cheap battery replacement... This timeline outlines how the "Batterygate" scandal was uncovered. You can also read more here. We are going to dive into the story of the Batterygate scandal and how it unfolded in their financial statements. When did Apple start to note the 59+ class action lawsuits that resulted from this scandal? When and for how much should they have started estimating the contingency loss from this scandal?
Although the problem clearly began unfolding in 2017, it did not specifically appear in the company's 10k with its own footnote until 2018.
2019: In the 2019 10k, Apple finally addresses the issue under the footnote "iOS Performance Management Cases" on page 53. Part of the footnote read: "The Company believes that its iPhones were not defective, that the performance management feature... intended to, and did, improve customers' user experience, and that the Company did not make any misleading statements or fail to disclose any material information. The Company has accrued its best estimate for the ultimate resolution of these matters." Apple now believes it is "probable" they will have to pay fees related to the litigation from Batterygate. Apple has accrued its best estimate for the resolution of these matters.
Problem 1: Assume Apple estimates that they will have to pay $100M to settle all litigation related to Batterygate. Write the journal entry that Apple will make before the 2019 year end:
Problem 2: How does this journal entry impact Apple's total assets, total liabilities and total owner's equity for 2019? Increase or decrease and by what amount? i) Total assets: ii) Total liabilities: iii) Total owner's equity:
Problem 3: Will Apple's net income be higher or lower because of this contingency liability?