Question

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Exercise 13-20 (Algo) Various transactions involving contingencles (LO13-5, 13-6) The following selected transactions relate to contingencles 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. Classical's products carry a one-year warranty against manufacturer's defects. Based on previous experience, warranty costs are expected to approximate 3% of sales. Sales were $2.3 million (all credit) for 2021. Actual warranty expenditures were $20.100 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 2021, the state of Tennessee filed suit against Classical, seeking penalties for violations of clean air laws. On January 23. 2022, Classical reached a settlement with state authorities to pay $1.8 million in penalties. 4. Classical is the plaintiff in a $4.3 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 $2.8 million. 5. In November 2021, 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 $530,000. 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 60% of the rebates will be claimed. Ten thousand and three hundred of the Jigsaws were sold in 2021. Total rebates to customers in 2021 were $108,000 and were recorded as promotional expense when pald. Required: 1-a Prepare the year-end entries for any amounts that should be recorded as a result of each of the above contingencles. 1-b Indicate whether a disclosure note is needed for the above transactions. Complete this question by entering your answers in the tabs below. Reg 1A Reg 1B 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.) View transaction lat Journal entry worksheet 1 2 3 4 5 6 Record any necessary year-end entry related to the warranties. Note: Enter debits before credits Transaction General Journal Debit Credit Record entry Clear entry View general Journal Reg 1A Reg 1B >

Answer 1

Solution to 1A

1.Journal Entry Worksheet - Warranty against Manufacturers Defect

Transaction	General journal	Debit	Credit
1. Warranty Expense	Warranty Expenses	$ 20,100
During the year	Cash		$ 20,100
2. Warranty Liability	Warranty Expense	$48,900
Year end entry	Estimated warranty Laibility		$48,900

Working:

The Acrued liability for future warranty Expenditure = 3% * 2,300,000 - 20,100

=69,000-20,100

= $ 48,900

2.Jounrnal Entry Worksheet - Uncollectable Credit Sales

Transactiom	General Journal	Debit	Credit
2. uncollectable sales	Bad debts	$ 46,000
	Provision for bad debts		$ 46,000

Total credit sales = 2,300,000

Estimated provision = 2,300,000 * 2%

= $ 46,000

3.Journal Entry Worksheet - Clean Air Law Violation

Transaction	General Journal	Debit	Credit
3. Law Violation	Law suit expense	$ 1,800,000
	Law suit liability		$ 1,800,000

Explanation: The law suit filed against classical after the end of the year but before the financial statements are issued. This is a contingent loss

4. Journal Entry Worksheet - Law suit filed against a supplier

Transaction	General journal	Debt	Credit
Law suit	No journal entry required	$2,800,000	$2,800,000

Explanation: Contingency gains are not acrued in the books even if the gain is probable and reasonably estimated. it is recognised on when realized.

5. Journal Entry Worksheet - Produt Recall

Transaction	General journal	Debit	Credit
5. product recall	Expense design flaw	$530,000
	Design flaw liability		$530,000

Explanation: This is a contingent loass where the outflow s probable and clearly measurable

6. Journal Entry Worksheet - Rebates

Transaction	General Journal	Debit	Credit
Actual rebtae	Promotional Expense	$108,000
(During te year)	Cash		$108,000
Rebate liability	Promotional expense	$46,500
(Year End)	Promotional liability		$46,500

Working:

Expense for the year = 60% * $25 * 10,300

=$154,500

Expemses already accounted = 108,000

Accrued liability = $154500-$108000

= $46,500

Solution to 1B

Events	Disclosure
Warranty	No disclosure note is required
Uncollectable credit sales	No disclosure note is required
Clean air law violation	Disclosure note is required
Law suit against a supplier	Disclosure note is required
Product Recall	Disclosure note is required
Rebate	No disclosure note is required