Chapter 8, Problem 8.47AP

 LO 4, 5

(Learning Objectives 4, 5: Account for estimated warranties payable; account for contingent liabilities) Randall Go-Karts sells motorized go-karts Randall Go-Karts are motorized and are typically purchased by amusement parks and other recreation facilities, but are also occasionally purchased by individuals for their own personal use. The company uses a perpetual inventory system. Selected transactions in the month of December follow;

    December 1    Randall sold 10 go-karts on account. The selling price of each go-kart was $1,000; the cost of goods sold for each was $250.

  5    Randall received notice of a class-action lawsuit being filed against it. The lawsuit claims that Randall's go-karts have engine defects that appear after the warranty period expires. The plaintiffs want Randall to replace the defective engines and pay damages for the owners’ loss of use. The cost of replacing the engines would be approximately $400,000 (not including any damages). Randall’s attorney believes that it is reasonably possible that Randall will lose the case, but the attorney cannot provide a dollar estimate of the potential loss amount.

  20    Randall performed repairs due to product warranty complaints for two go-karts sold earlier in the year. Randall's cost of the repairs, paid in cash, was $500.

  22    An individual claims that he suffered emotional distress from a high-speed ride on a Randall Go-Kart and is seeking $500,000 in damages. Randall’s attorney believes the case is frivolous because it does not have any legal merit.

  27    Another customer is suing Randall for $200,000 because a defect in the customer’s Randall Go-Kart engine started a fire and destroyed the customer’s garage. Randall's attorney believes the customer will probably win the case and receive $200,000. (Use the following account names: Loss from Lawsuit and Accrued Liability from Lawsuit.)

  31    Randall estimates that the warranty expense is 5% of gross sales. Randall's gross sales for the period totaled $700,000.

  Requirements

  1.    Prepare the journal entries to record the transactions shown. Omit explanations.

  2.    Describe how each of the contingent liabilities in the selected December transactions would be treated in Randall’s financial statements for 2019.