Question

Cupola awning corporation introduced a new line of commercial awnings in 2018 that carry a two-year warranty against manufacturer's defects. Based on their experience with previous product introductions, warranty costs are expected to approximate 3% of sales. Sales and actual warranty expenditures for the first year of selling the product were:

Answer 1

Answer and Explanation:

1. Yes, this situation represents a loss contingency.

The occurrence of warranty liability is probable and the amount can be reasonably estimated so it represents a contingent liability.

2.

a. Accounts receivable Dr, $5,780,000

To Sales $5,780,000

(Being the sales is recorded)

b. Warranty expense Dr, $173,400 (5,780,000 × 3%)

To Estimated warranty liability $173,400

(Being the warranty expense is recorded)

c. Estimated warranty liability Dr, $38,500

To Cash, wages payable, parts and supplies, etc. $38,500

(Being cash paid is recorded)

3 .Liability = $173,400 - $38,500

= $134,900