To record sales: 150 copiers * $4,000 each = $600,000 Entries: Cash (150 * $4,000) 600,000 Sales 600,000 Warranty Expense 17,000 Cash, Inventory, Accrued Payroll 17,000 Warranty Expense ($45,000 - $17,000) 28,000 Estimated Liability under warranties 28,000 You could have also done it this way: Cash 600,000 Sales 600,000 Warranty Expense 45,000 Warranty Liability 45,000 Warranty Liability 17,000 Cash 17,000 (b) On the basis of the data above, prepare the appropriate entries, assuming that the cash basis method is used. Cash 600,000 Sales 600,000 Warranty Expense 17,000 Cash, Inventory, Accrued Payroll 17,000 To record the estimated warranty expense: $300 * 150 units = $45,000.
E13-13 (Contingencies) Presented below are three independent situations. Answer the question at the end of each situation. 1 During 2010, Maverick Inc. became involved in a tax dispute with the IRS. Maverick's attorneys have indicated that they believe it is probable that Maverick will lose this dispute. They also believe that Maverick will have to pay the IRS between $800,000 and $1,400,000. After the 2010 financial statements were issued, the case was settled with the IRS for $1,200,000. What amount, if any, should be reported as a liability for this contingency as of December 31, 2010? The FASB requires that, when some amount within the range of expected loss appears at the time to be a better estimate than any other amount within the range, that amount is accrued. When no amount within the range is a better estimte than any other amount, the dollar amount at the low end of the range is acrued and the dollar amount at the high end of the range is disclosed. In this case, therefore, Maverick Inc. would report a liability of $800,000 at December 31, 2010. (See FIN14: Reasonable Estimation of the Amount of Loss: An Interpretation of SFAS No. 5) 2 On October 1, 2010, Holmgren Chemical was identified as a potentially responsible party by the Environmental Protection Agency. Holmgren's management along with its counsel have concluded that it is probable that Holmgrem will be responsible for damages, and a reasonable estimate of these damages is $6,000,000. Holmgren's insurance poicy of $9,000,000 has a deductible clause of $500,000. How should Holmgren Chemcial report this information in its financial statements at December 31, 2010? The loss should be accrued for $6,000,000. The potential insurance recovery is a gain contingency. It is not recorded until it is received. According to FASB ASC 410-30-35-8 claims for recoveries may be recorded if the recovery is deemed probable. 3 Shinobi Inc. had a manufacturing plant in Darfur, which was destroyed in the civial war. It is not certain who will compensate Shinobi for this destruction, but Shinobi has been assured by governmental officials that it will receive a definite amount for the plant. The amount of the compensation will be less than the fair value of the plant, but more than its book value. How should the contingency be reported in the finanical statements of Shinobi Inc.?