Question

1.		Bolivia provides a warranty with all its products it sells. It estimates that it will sell 1,000,000 units of its product for the year ended December 31, 2020, and that its total revenue for the product will be $100,000,000. It also estimates that 60% of the product will have no defects, 30% will have major defects, and 10% will have minor defects. The cost of a minor defect is estimated to be $5 for each product sold, and the cost for a major defect cost is $15. The company also estimates that the minimum amount of warranty expense will be $2,000,000 and the maximum will be $10,000,000.
2.		Bolivia is involved in a tax dispute with the tax authorities. The most likely outcome of this dispute is that Bolivia will lose and have to pay $400,000. The minimum it will lose is $20,000 and the maximum is $2,500,000.

Prepare the journal entry to record provisions, if any, for Bolivia at December 31, 2020

No. Account Titles and Explanation Debit Credit Warranty Expense 5000000 Warranty Liability 5000000 Litigation Expense or Loss 400000 Litigation Liability 400000

Answer 1

Answer: No. Credit Debit 5,000,000 Account Titles and Explanation Warranty Expense (1,000,000 * $5) Warranty Liability Income Tax Expense Income Taxes Payable 5,000,000 400,000 400,000