Cupola Awning Corporation introduced a new line of commercial awnings in 2018 that carry a two-year warrantyagainst manufacturer’s defects. Based on their experience with previous product introductions, warranty costsare expected to approximate 3% of sales. Sales and actual warranty expenditures for the first year of selling theproduct were:Sales Actual Warranty Expenditures$5,000,000 $37,500Required:1. Does this situation represent a loss contingency? Why or why not? How should Cupola account for it?2. Prepare journal entries that summarize sales of the awnings (assume all credit sales) and any aspects of thewarranty that should be recorded during 2018.3. What amount should Cupola report as a liability at December 31, 2018?
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:
Sales Actual Warranty Expenditures
$5,000,000 $37,500
Required:
1. Does this situation represent a loss contingency? Why or why not? How should Cupola account for it?
2. Prepare
warranty that should be recorded during 2018.
3. What amount should Cupola report as a liability at December 31, 2018?
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