You are the independent auditor engaged to audit Broady Corporation’s December 31, 2022, financial statements. Broady manufactures small appliances. During the course of your audit, you discovered the following contingent liabilities. 1. Broady began production of a new blender in August 2022 and, by December 31, 2022, sold 381,000 to various retailers for $60 each. Each blender is under a one-year warranty. The company estimates that its warranty expense per blender will amount to $4. At year-end, the company had already paid out $831,000 in warranty expenses. Broady‘s income statement shows warranty expenses of $831,000 for 2022. Broady accounts for warranty costs on the accrual basis. 2. Broady is the defendant in a patent infringement lawsuit by Crusher Blenders, Inc. over Broady‘s use of a blade design and ice crushing technique in its new blender. Broady’s general counsel claims that, if the suit goes against Broady, the loss would be approximately $25,000,000; however, their attorney believes the loss of this suit to be only reasonably possible. No amount is shown on the financial statements and no mention of this suit is made in the financial statement notes. 3. In response to your attorney’s letter, Broady’s general counsel has informed you that Broady has been cited for burying toxic chemicals behind one of the plants. Clean-up costs and fines amount to $4,200,000. Although the case is still being contested, their attorney is certain that Broady will most probably have to pay at least $3,500,000 of the fine and clean-up costs. No disclosure of this situation was found in the financial statements. REQUIRED: For each of the above contingent liabilities, describe the correct accounting treatment.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
You are the independent auditor engaged to audit Broady Corporation’s December 31, 2022, financial
statements. Broady manufactures small appliances. During the course of your audit, you discovered the
following
1. Broady began production of a new blender in August 2022 and, by December 31, 2022, sold 381,000 to
various retailers for $60 each. Each blender is under a one-year warranty. The company estimates
that its warranty expense per blender will amount to $4. At year-end, the company had already paid
out $831,000 in warranty expenses. Broady‘s income statement shows warranty expenses of $831,000
for 2022. Broady accounts for warranty costs on the accrual basis.
2. Broady is the defendant in a patent infringement lawsuit by Crusher Blenders, Inc. over Broady‘s use of
a blade design and ice crushing technique in its new blender. Broady’s general counsel claims that, if
the suit goes against Broady, the loss would be approximately $25,000,000; however, their attorney
believes the loss of this suit to be only reasonably possible. No amount is shown on the financial
statements and no mention of this suit is made in the financial statement notes.
3. In response to your attorney’s letter, Broady’s general counsel has informed you that Broady has been
cited for burying toxic chemicals behind one of the plants. Clean-up costs and fines amount to
$4,200,000. Although the case is still being contested, their attorney is certain that Broady will most
probably have to pay at least $3,500,000 of the fine and clean-up costs. No disclosure of this situation
was found in the financial statements.
REQUIRED: For each of the above contingent liabilities, describe the correct accounting treatment.
Contingent Liability
It is important to made provisions of contingent liability is important for the entity to meet the expenses which are incurred to this as well. There are four reason which are stated to determine the contingent liability. They are given below
- Most Probable condition
- Probable condition
- Reasonably possible condition
- Remote condition
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