In: Accounting
The following selected transactions relate to contingencies of
Classical Tool Makers, Inc., which began operations in July 2021.
Classical’s fiscal year ends on December 31. Financial statements
are issued in April 2022.
1-a Prepare the year-end entries for any amounts that should be recorded as a result of each of the above contingencies.
1-b
Indicate whether a disclosure note is needed for the above transactions.
|
Answer-
Event | Account | Debit | Credit | |
1 | Warranty Expenses | $ 48,900 | ||
1 | Estimated Warranty Liabilities | $ 48,900 | ||
to record warranty provision(2,300,000*3%)-20,100 | ||||
2 | Bad Debt Expense | $ 46,000 | ||
2 | Allowance for uncollectible Accounts | $ 46,000 | ||
(to record bad debt allowance) 2.3m*2% | ||||
3 | Loss Litigation | $ 1,800,000 | ||
3 | Liability Litigation | $ 1,800,000 | ||
(to record penalty) | ||||
4 | This is a gain contingency and gain contingencies are not accrued even if the gain is probable and reasonably estimable. The gain should be recognized only when realized. Disclosure Note can be given. | |||
5 | Loss Product Recall | $ 530,000 | ||
5 | Liability Product Recall | $ 530,000 | ||
(to record penalty) | ||||
6 | Promotional Expense | $ 46,500 | ||
6 | Estimated Premium Liabilities | $ 46,500 | ||
(to record promotional exp) | ||||
(10,300*25*60%)-108,000 | ||||
Disclosure Note: | ||||
1 | Yes | |||
2 | Yes | |||
3 | Yes | |||
4 | Yes | |||
5 | Yes | |||
6 | No |