Question

Hawley Corporation issues one-year limited warranties with all of their products. Based on their past history with warranties, they report a potential liability of 8% of their cost of goods sold on their financial statements. This is an example of reporting a(n):

A) capital lease.
B) operating lease.
C) contingency.
D) covenant.

Answer 1

Hawley Corporation is reporting a 'contingency' by estimating warranty costs based on past events and recognizing them on their financial statements.

Step-by-step explanation:

The Hawley Corporation reporting a potential liability of 8% of their cost of goods sold on their financial statements is an example of reporting a contingency.The Hawley Corporation reporting a potential liability of 8% of their cost of goods sold on their financial statements is an example of reporting a contingency.

When Hawley Corporation issues one-year limited warranties with all their products and reports a potential liability of 8% of their cost of goods sold on their financial statements, they are reporting a contingency. This is because a contingency is a potential financial liability or loss that arises as the result of a past event, and its outcome is confirmed by future events, the outcome of which may be uncertain. Reporting this warranty obligation involves estimating the potential costs based on past history and recognizing it as a liability, reflecting the company's obligation to cover warranty claims.