Question

Cupola Awning Corporation introduced a new line of commercial awnings in 2021 that carry a two-year warranty against manufacturer's defects. Based on their experience with previous product introductions, warranty costs are expected to approximate 1% of sales. Sales and actual warranty expenditures for the first year of selling the product were: Sales $5,900,000 Actual Warranty Expenditures $ 37,750 Required: 1. Does this situation represent a loss contingency? 2. Prepare journal entries that summarize sales of the awnings (assume all credit sales) and any aspects of the warranty that should be recorded during 2021. 3. What amount should Cupola report as a liability at December 31, 2021?

Answer 1

Answers Does othing situation represent a lacs contingency's is A loss contingeney is on Existing condition with unterlaunty relating to possible gain low loss based on fearlene Events. The liability is probable and can be reasonably estimated so liability must be accrued. SO) :: This is a loss contingency $5,900,000 O prepare Journal Entries General Journal Debit ) credit (1) accounts receivable $5,900,000 sales revenue warranty Liability 37, 150 $399,950 3 Amount should cupola report as a liability at Dec 31, 2002); Amount Ceepola report as a liability al Dee 131, 3021 is the Ending balance cishich is calculated as acerucd warranty cash

, liability fess the actual cocoranty apenditene poid. @ So, => Amount cupola' report as liability and see 3*2001 = accrued wanonte fiability actual wawantly expenditure paid = 144 X 5,900,000) -34,750 = $59,000 -37,750 = $ 1,250 -- Amount coupola report as a liability and Dec 31,2001 = $21,250]