The following selected transactions relate to contingencies of Classical Tool Ma
ID: 2562630 • Letter: T
Question
The following selected transactions relate to contingencies of Classical Tool Makers, Inc., which began operations in July 2016. Classical’s fiscal year ends on December 31. Financial statements are issued in April 2017.
Classical's products carry a one-year warranty against manufacturer’s defects. Based on previous experience, warranty costs are expected to approximate 2% of sales. Sales were $3.5 million (all credit) for 2016. Actual warranty expenditures were $25,800 and were recorded as warranty expense when incurred.
Although no customer accounts have been shown to be uncollectible, Classical estimates that 2% of credit sales will eventually prove uncollectible.
In December 2016, the state of Tennessee filed suit against Classical, seeking penalties for violations of clean air laws. On January 23, 2017, Classical reached a settlement with state authorities to pay $3.0 million in penalties.
Classical is the plaintiff in a $5.5 million lawsuit filed against a supplier. The suit is in final appeal and attorneys advise that it is virtually certain that Classical will win the case and be awarded $4.0 million.
In November 2016, Classical became aware of a design flaw in an industrial saw that poses a potential electrical hazard. A product recall appears unavoidable. Such an action would likely cost the company $650,000.
Classical offered $25 cash rebates on a new model of jigsaw. Customers must mail in a proof-of-purchase seal from the package plus the cash register receipt to receive the rebate. Experience suggests that 70% of the rebates will be claimed. Eleven thousand and five hundred of the jigsaws were sold in 2016. Total rebates to customers in 2016 were $120,000 and were recorded as promotional expense when paid.
Prepare the year-end entries for any amounts that should be recorded as a result of each of the above contingencies. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)
2. Record any necessary year-end entry related to uncollectible accounts.
3. Record any necessary year-end entry related to clean air law violations
4. Record any necessary year-end entry related to the lawsuit filed against a supplier.
5. Record any necessary year-end entry related to a product recall.
6. Record any necessary year-end entry related to rebates
PLEASE CHOOSE FROM THE LIST BELOW TO JOURNALIZE
Note: Debits before credits
No journal entry required
Accounts receivable
Allowance for uncollectible accounts
Bad debt expense
Bonds payable
Cash
Cost of goods sold
Deferred rent revenue
Deferred sales revenue
Discount on notes payable
Estimated premium liability
Estimated warranty liability
Interest expense
Interest payable
Interest receivable
Interest revenue
Liability—litigation
Liability—product recall
Loss—litigation
Loss—product recall
Notes payable
Notes receivable
Promotional expense
Rent revenue
Salaries and wages expense
Salaries and wages payable
Sales revenue
Warranty expense
1.Classical's products carry a one-year warranty against manufacturer’s defects. Based on previous experience, warranty costs are expected to approximate 2% of sales. Sales were $3.5 million (all credit) for 2016. Actual warranty expenditures were $25,800 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 2016, the state of Tennessee filed suit against Classical, seeking penalties for violations of clean air laws. On January 23, 2017, Classical reached a settlement with state authorities to pay $3.0 million in penalties.
4.Classical is the plaintiff in a $5.5 million lawsuit filed against a supplier. The suit is in final appeal and attorneys advise that it is virtually certain that Classical will win the case and be awarded $4.0 million.
5.In November 2016, Classical became aware of a design flaw in an industrial saw that poses a potential electrical hazard. A product recall appears unavoidable. Such an action would likely cost the company $650,000.
6.Classical offered $25 cash rebates on a new model of jigsaw. Customers must mail in a proof-of-purchase seal from the package plus the cash register receipt to receive the rebate. Experience suggests that 70% of the rebates will be claimed. Eleven thousand and five hundred of the jigsaws were sold in 2016. Total rebates to customers in 2016 were $120,000 and were recorded as promotional expense when paid.
Explanation / Answer
Year end entries
1. Warranty expense Dr. ((2%*3500000)-25800) 44,200
Estimated warranty liabilityCr. 44,200
2. Bad debt expense Dr. (3500000*2%) 70,000
Allowance for uncollectible accounts Cr. 70,000
3. Loss - litigation Dr. 3,000,000
Liability - litigation Cr. 3,000,000
4. No entry 0
No entry 0
5. Loss - product recall Dr. 650,000
Liability - product recall Cr. 650,000
6. Promotional expense Dr. ((70%*25*11500)-120000) 81250
Estimated premium liability Cr. 81250
PART B
1. No
2. No
3. yes - This is a loss contingency.Classical can use the information occurring after theend of the year and before the financial statements are issued to determine appropriate disclosure.
4. yes - This is a gain contingency.Gain contingencies are not accrued even if the gainis probable and reasonably estimable.The gain should be recognized onlywhen realized.A disclosure note is appropriate.
5. yes
6. no