Question

Cupola Awning Corporation Introduced a new line of commercial awnings In 2018 that carry a two-year warranty agalnst 2% of sales. Sales and actual warranty expenditures for the first year of selling the product were: Actual Warranty Expenditures $49,500 ales $5,340, 000 Required: 1. Does thls sltuation 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 2018. 3. What amount should Cupola report as a liablity at December 31, 2018? Complete this question by entering your answers in the tabs below. Does this situation represent a loss contingency? Loss ( Required! Required 2>

Answer 1

1)Yes , as transaction has occurred and related warranty obligation has been incurred.A reason for contingent liability is that it is probable that warranty cost will be incurred and the amount can be reasonable estimated.

2)

Date	Account	Debit	credit
1	Accounts receivable	5340000
	sales revenue		5340000
	[To record sales]
2	Warranty expense	106800
	estimated warranty liability		106800
	[warranty liability 5340000*.02]
3	estimated warranty liability	49500
	cash		49500

3)Liability = 106800-49500= 57300