The following is an excerpt from USA Today.com in July 2007:
Microsoft (MSFT) on Thursday extended the warranty on its Xbox 360 video game console and said it will take a charge of more than $1 billion to pay for "anticipated costs." Under the new warranty, Microsoft will pay for shipping and repairs for three years, worldwide, for consoles afflicted with what gamers call "the red ring of death." Previously, the warranty expired after a year for U.S. customers and two years for Europeans. The charge will be $1.05 billion to $1.15 billion for the quarter ended June 30. Microsoft reports its fourth-quarter results July 19.
Required:
1. Why must Microsoft report this charge of over $1 billion entirely in one quarter, the last quarter of the company's fiscal year ended June 30, 2007?
2. When the announcement was made, analyst Richard Doherty stated that either a high number of Xbox 360s will fail or the company is being overly conservative in its warranty estimate. From an accounting standpoint, what will Microsoft do in the future if the estimate of future repairs is overly conservative (too high)?