Question

The following situations relate to Washburn Company.

1. Washburn provides a warranty with all its products it sells. It estimates that it will sell 1,200,000 units of its product for the year ended December 31, 2019, and that its total revenue for the product will be €100,000,000. It also estimates that 60% of the product will have no defects, 40% will have defects. The cost of a defect is estimated to be $10 for each product repaired.

2. Washburn is involved in a tax dispute with the tax authorities. The most likely outcome of this dispute is that Washburn will lose and have to pay €500,000. The minimum it will lose is €25,000 and the maximum is €3,000,000.

3. In August, 2019 a worker was injured in the factory in an accident partially the result of his own negligence. The worker has sued Washburn Co. for €800,000. Counsel believes it is possible but not probable that the outcome of the suit will be unfavorable and that the settlement would cost the company €250,000.

4. Washburn has a policy of refunding purchases to dissatisfied customers, even though it is under no obligation to do so. However, it has created a valid expectation with its customers to continue this practice. These refunds is estimated to be 5% of sales. In 2019, Washburn has €50,000,000 of sales subject to possible refund.

Instructions

1. Classify whether the transactions above is PROVISIONS or CONTINGENT LIABILITES.
2. Please indicate the accounting procedure whether the transactions above need to

1. Adjust and Disclose or

2. Disclose or

3. Neither adjust nor disclose.

3. If the above requirements need to adjust and disclose, prepare the journal entry to adjust the transactions with workings for Washburn at December 31, 2019.

(Note: Please write the following heading in the table of your worksheet.)

Transaction	(1) Provision / Contingent Liabilities	(2) Adjust and Disclose or Disclose or Neither Adjust nor Disclose
1.
2.
3.
4.

          

Answer 1

	Washburn Company
	Transaction 1.
	units sold in 2019	1,200,000
	units estimated to be defective @40%	480,000
	estimate for defect warranty @$10/unit	$      4,800,000
	For warranty , the amount needs to be provisioned and
	disclosed
Date	Details	Dr $	Cr$
12/31/2019	Provision for Warranty		$     4,800,000
	Warranty expense	$      4,800,000
	Transaction 2.
For the Tax dispute the claim is most likely to happen and the amount can be
ascertained . So this needs to be taken as provision and also needs to
be disclosed. The most probable amount is Eur 500,000
	Journal entry
Date	Details	Dr $	Cr$
12/31/2019	Tax Liability		€   500,000.00
	Tax Expense	€    500,000.00
	Transaction 3.
Regarding the claim by factory worker, the liability is possible but
not probable. So there is not need to make provision for this.
So no need to adjust but the contingent liability needs to be
disclosed with the amount of possible claim .
	Transaction 4.
	Sales subject to possible refund	€    50,000,000
	possible return @5%=	€      2,500,000
Though there is no obligation to make sales return , the company
generally does the return as a policy and there is a valid expectation
from customers.
So this amount needs to adjusted and disclosed.
	Journal entry
Date	Details	Dr $	Cr$
12/31/2019	Sales Returns	€      2,500,000
	Allowance for Sales Returns		€     2,500,000