S13 million is probable. The following selected transactions relate to contingen

Question

S13 million is probable. The following selected transactions relate to contingencies of Classical Tool Makers, Inc., which began in July 2018. Classical's fiscal year ends on December 31. Financial statements are issued in April 2019 Required: Prepare the year-end entri indicate whether a disclosure note is indicated. 1. Classical's products carry a one-year warranty against manufacturer's defects. Based on previo es for any amounts that should be recorded as a result of each of these contingencies us ex warranty costs are expected to approximate 4% of sales. Sales were $2 million (all credit) for 2018 Actual warranty expenditures were $30,80 0 and were recorded as warranty expense when incurred. 2. Although no customer accounts have been shown to be uncollectible, Classical estimates that 2 % of credit sales will eventually prove uncollectible 3. In December 2018, the state of Tennessee filed suit against Classical, seeking penalties for violations of d air laws. On January 23, 2019, Classical reached a settlement with state authorities to pay $1.5 million in penalties 4. Classical is the plaintiff in a $4 million lawsuit filed against a supplier. The suit is in final appeal and 5. In November 2018, Classical became aware of a design flaw in an industrial saw that poses a potential elec 6. Classical offered $25 cash rebates on a new model of jigsaw. Customers must mail in a proof-of-purchase neys advise that it is virtually certain that Classical will win the case and be awarded $2.5 million trical hazard. A product recall appears unavoidable. Such an action would likely cost the company $500,00 seal from the package plus the cash register receipt to receive the rebate. Experience suggests that 0% ofthe rebates will be claimed. Ten thousand of the jigsaws were sold in 2018. Total rebates to customers in 2018 were $105,000 and were recorded as promotional expense when paid.

Explanation / Answer

Solution:

From the given data, we need to find answers for given requirements,

Answer for 1.

  Journal entries for the year end

  

Answer for 2.

Indication whether a disclousure note is needed for the above transactions:

  

1. NO

2. NO

3. YES, it was contigency for the firm, in which payout is conformed and is now liability

4. YES, it is gain contigency of the firm , gain is not recognized till realized , so it is shown as disclousure note.

5. YES, it is contingency for the firm which is most probably liability created , should be disclose as note.

6. NO.

Working notes:

1. Warrenty expense = 4% of sales - already recorded

= 4% * $2,000,000 - $30,800

= $49,200

2. Bad debt expense = 2% of sales

= 2% * $2,000,000

= $40,000

6. Promosional expense =

cash rebate for jigsaw * rebate claimed percentage * units sold - total rebates paid to customer

Promotional expense = $25 * 60% * 10,000 - $105,000

= $45,000

No Accounts details Debit ($) Credit ($) 1 Warrenty expense 49,200 Estimated warrenty liability 49,200 2 Bad debt expense 40,000 Allowance for uncollectable accounts 40,000 3 Loss - lotigation 1,500,000 Liability - litigation 1,500,000 4 No entries for this statement - '' - 5 Loss - product recall 500,000 Liability - product recall 500,000 6 Promotional expense 45,000 Estimated premium liability 45,000

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