GEN COMBO LOOSELEAF INTERMEDIATE ACCOUNTING; CONNECT ACCESS CARD

9th Edition

ISBN: 9781260089042

Author: J. David Spiceland

Publisher: McGraw-Hill Education

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Textbook Question

Chapter 13, Problem 13.15E

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?

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.

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Chapter 13, Problem 13.14E

Chapter 13, Problem 13.16E

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Chapter 13 Solutions

GEN COMBO LOOSELEAF INTERMEDIATE ACCOUNTING; CONNECT ACCESS CARD

Ch. 13 - What are the essential characteristics of...Ch. 13 - Prob. 13.2Q Ch. 13 - Bronson Distributors owes a supplier 100,000 on...Ch. 13 - Bank loans often are arranged under existing lines...Ch. 13 - Prob. 13.5Q Ch. 13 - Prob. 13.6Q Ch. 13 - Salaries of 5,000 have been earned by employees by...Ch. 13 - Prob. 13.8Q Ch. 13 - Prob. 13.9Q Ch. 13 - Prob. 13.10Q

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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.

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