Warranties • LO13–5, LO13–6 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: S a l e s $ 5 , 000 , 000 A c t u a l W a r r a n t y E x p e n d i t u r e s $ 37 , 500 Required: 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 the warranty that should be recorded during 2018. 3. What amount should Cupola report as a liability at December 31, 2018?
Warranties • LO13–5, LO13–6 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: S a l e s $ 5 , 000 , 000 A c t u a l W a r r a n t y E x p e n d i t u r e s $ 37 , 500 Required: 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 the warranty that should be recorded during 2018. 3. What amount should Cupola report as a liability at December 31, 2018?
Solution Summary: The author explains that warranty is an assurance provided to a customer by the seller, and is recognized at the time of sale.
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:
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Required:
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 the warranty that should be recorded during 2018.
3. What amount should Cupola report as a liability at December 31, 2018?
Definition Definition Costs that a business is responsible for paying, should a particular event potentially occur in the future. Also called a potential liability, a contingent liability is generally recorded only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly. The Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Principles (IFRS) make it mandatory for the companies to record any contingent liability taking the principles of full disclosure, materiality, and prudence into consideration.
Aerotrino produces and sells popular t-shirts. Following is information about
its t-shirts for 2014:
Selling price $15.00 per
t-shirt
Variable costs:
Production (manufacturing costs) - $3.50
per t-shirt
Selling & administration -
$1.00 per t-shirt
Fixed costs:
Production (manufacturing costs) - $1,000,000 per year
Selling & administration - $2,000,000 per year
During 2014, the company produced 400,000 t-shirts and sold 350,000 of
them. Assume that there was no beginning inventory. How much is the net
income under variable costing?
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