Question

ctice Exercises Chapter 13 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. Classical's products carry a one-year warranty against manufacturer's defects. Based on previous experience, warranty costs are expected to approximate 4% of sales. Sales were $2 million (all credit) for 2021. Actual warranty expenditures were $30,800 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 $1.5 million in penalties. 4. Classical is the plaintiff in a $4 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 $2.5 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 $500,000. 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 of the jigsaws were sold in 2021. Total rebates to customers in 2021 were $105,000 and were recorded as promotional expense when paid. Required: 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. Complete this question by entering your answers in the tabs below. Req 1A Req 1B < Prev 7 of 8 # Score answer >

Answer 1

1. Warranty expenses losses a/c. Dr. 49200

To warranty expenses 49200

(being estimated warranty expenses recorded

$2 *4%=80000; 80000-30800=49200)

2. Doubtful debts a/c. Dr. 40000

To Debtors A/c. 40000

(being estimated doubtful debts recorded

$2*2%=40000)

3. Law suit loss A/c. Dr. 1500000

To Law suit A/c. 150000

(being estimated value of law suit is recorded)

5. design fawll loss a/c. Dr. 500000

To Desiign fawl a/c. 500000

(being estimated value of loss arising due to design fawl is recorded)

6. Promotional expensesloss a/c, Dr. 45000

To promotional Expensesa/c. 45000

(Being residual estimated loss due to promorion sceme has been recorded

10000*25=250000

250000*60%=150000

150000-105000=45000)

Note: 4. no entry would be made for this as this is not arising any liability.

Answer B: yes all above entries should be well disclosed in footnotes

A