Dusty Johnson is the accounting and finance manager for a manufacturer. At year-end, he must determine how to account for the company’s contingencies. His manager, Tom Pretti, objects to Johnson’s proposal to recognize an expense and a liability for warranty service on units of a new product introduced in the fourth quarter. Pretti comments, “There’s no way we can estimate this warranty cost. We don’t owe anyone anything until a product fails and it is returned. Let’s report an expense if and when we do any warranty work.” Required Prepare a one-page memorandum for Johnson to send to Pretti defending his proposal.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Dusty Johnson is the accounting and finance manager for a manufacturer. At year-end, he must
determine how to account for the company’s contingencies. His manager, Tom Pretti, objects to Johnson’s
proposal to recognize an expense and a liability for warranty service on units of a new product introduced
in the fourth quarter. Pretti comments, “There’s no way we can estimate this warranty cost. We don’t owe
anyone anything until a product fails and it is returned. Let’s report an expense if and when we do any
warranty work.”
Required
Prepare a one-page memorandum for Johnson to send to Pretti defending his proposal.

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