The treasurer of Landowska Co. has heard that conservatismis a doctrine that is followed in accounting and,therefore, proposes that several policies be followed thatare conservative in nature. State your opinion with respectto each of the policies listed.(a) The company gives a 2-year warranty to its customerson all products sold. The estimated warranty costs incurred from this year’s sales should be entered asan expense this year instead of an expense in the periodin the future when the warranty is made good.(b) When sales are made on account, there is always uncertaintyabout whether the accounts are collectible.Therefore, the treasurer recommends recording thesale when the cash is received from the customers.(c) A personal liability lawsuit is pending against thecompany. The treasurer believes there is an evenchance that the company will lose the suit and haveto pay damages of $200,000 to $300,000. The treasurerrecommends that a loss be recorded and a liabilitycreated in the amount of $300,000.
The treasurer of Landowska Co. has heard that conservatism
is a doctrine that is followed in accounting and,
therefore, proposes that several policies be followed that
are conservative in nature. State your opinion with respect
to each of the policies listed.
(a) The company gives a 2-year warranty to its customers
on all products sold. The estimated warranty costs incurred from this year’s sales should be entered as
an expense this year instead of an expense in the period
in the future when the warranty is made good.
(b) When sales are made on account, there is always uncertainty
about whether the accounts are collectible.
Therefore, the treasurer recommends recording the
sale when the cash is received from the customers.
(c) A personal liability lawsuit is pending against the
company. The treasurer believes there is an even
chance that the company will lose the suit and have
to pay damages of $200,000 to $300,000. The treasurer
recommends that a loss be recorded and a liability
created in the amount of $300,000.
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