Question

Listed below are selected events transactions relating to Metlock, Inc. for the current year ending December 31. Metlock manufactures laptop computers for sale in its own stores and for sale by other retailers. 1. On December 1, Metlock accepted an order from a new customer, Sweet Acacia Computers. Sweet Acacia has a questionable credit history, so Metlock requires a $8,000 deposit from Sweet Acacia in order to begin production on its order. 2. During December, cash sales at Metlock's retail locations totaled $3,317,000, which includes the 7% sales tax Metlock must remit to the state by the fifteenth day of the following month. 3. During the year, Metlock was sued by a competitor for a patent violation. The competitor is claiming that Metlock's liability is $2,000,000. Metlock's attorneys have advised it that it is probable that the court will find for the company's competitor. The attorneys estimate that the liability under the suit could be as little as $80,000 or as much as $400,000. The attorneys do not believe any amount within this range is a better estimate of Metlock's liability than any other amount within the range, 4. Metlock provides one-year warranties on the laptops it sells. During the year, Metlock's laptop sales totaled $80,000,000. Historically, Metlock's warranty liability has been one percent of total sales. Metlock began the year with a warranty liability balance of $640,000. Warranty expenditures during the year were $620,000 for computers sold in prior years and $192,000 for computers sold during the year. These expenditures were recorded as credits to cash and debits to the warranty liability account. Any remaining warranty liability is expected to relate to computers sold during the current year.

Answer 1

In the books of Metlock Inc. :

Transaction/ Event	Account Titles	Debit	Credit
		$	$
1.	Cash	8,000
	Advance from Customer		8,000
2.	Cash	3,317,000
	Sales		3,100,000
	Sales Tax Payable		217,000
3.	Litigation Loss	80,000 *
	Litigation Liability		80,000
4.	Warranty Expense	780,000
	Warranty Liability		780,000

* Under U.S. GAAP, lower end of the range is recognized as the amount of the loss contingency.

However, under IFRS, the midpoint of the range would be provided for as a loss contingency. Therefore the amount recognized as a loss contingency would have been $ 240,000.