Fusion, Inc. introduced a new line of circuits in 2016 that carry a four-year wa

Question

Fusion, Inc. introduced a new line of circuits in 2016 that carry a four-year warranty against manufacturer's defects. Based on experience with previous product introductions, warranty costs are expected to approximate 3% of sales. Sales and actual warranty expenditures for the first year of selling the product were:

Required:

1. Does this situation represent a loss contingency? Why or why not? How should it be accounted for?
2. Prepare journal entries that summarize sales of the circuits (assume all credit sales) and any aspects of the warranty that should be recorded during 2016.
3. What amount should Fusion report as a liability at December 31, 2016?

Explanation / Answer

Fusion Inc. Details Amt $ Sales in 2016        15,000,000 Warranty provision@3% of sales =              450,000 Actual warranty expense in 2016              200,000         1 The situation will be a loss contingency as there is possibility of future liability depending on   some future possible events. However as the amount of liability can be   estimated and the liability is probable , the   liability needs to be recognized in the fiancial statements.         2 Journal Entries Account Title Dr $ Cr $ Sales Revenue     15,000,000 Accounts Receivable        15,000,000 ( sales recording) Warranty Expense              450,000 Warranty Liability           450,000 ( recording warranty liability @3% of sales) Cash           200,000 Warranty Liability              200,000 ( recording actual warranty expense)         3 Balance of Warranty Liability to be reported on Dec 31.2016.=              250,000

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