1b is where Im having trouble newconnectmheducationcomflowco

1-b is where I\'m having trouble

|newconnect.mheducation.com/flow/connect.html Ch 13 Hmk G Help Save & Exit Submit Check my work Exercise 13-20 Various transactions involving contingencies [LO13-5, 13-6] 10 points The following selected transactions relate to contingencies of Classical Tool Makers, Inc., which began operations in July 2018. Classical\'s fiscal year ends on December 31. Financial statements are issued in April 2019. 1. Classical\'s products carry a one-year warranty against manufacturer\'s defects. Based on previous experience, warranty costs are expected to approximate 4% of sales. Sales were $2 millon a credit for 2011 tu al vana ty pe it re eBook Pint References 2. Although no customer accounts have been shown to be uncollectible. Classical estimates that 2% of credit sales will 3. In December 2018, the state of Tennessee filed suit against Classical, seeking penalties for violations of clean air laws. 4. Classical is the plaintiff in a $4 million lawsuit filed against a supplier. The suit is in final appeal and attorneys advise that it 5. In November 2018, Classical became aware of a design flaw in an industrial saw that poses a potential electrical hazard 6. Classical offered $25 cash rebates on a new model of jigsaw. Customers must mail in a proof-of purchase seal from the were $30,800 and were recorded as warranty expense when incurred. eventually prove uncollectible On January 23, 2019, Classical reached a settlement with state authorities to pay $1.5 million in penalties is virtually certain that Classical will win the case and be awarded $2.5 million. A product recall appears unavoidable. Such an action would likely cost the company $500.000. package plus the cash register receipt to receive the rebate. Experience suggests that 60% of the rebates will be 7

Solution

Points 1,2 and 6 does not need any disclosure note as these are normal business transactions. The accounting policy regarding such matters need to me mentioned , which is normally done in the financial reoprts.

Points 3,4, and 5 are exceptional items which are not normal to business , hence a disclosure note with respect to the matters and the amount of costs / gains involved in them need disclosure.

1. This does not need any disclosure note. As the liability will be created in the accounts for the difference. Liability to be created will be for $49,200 ($80,000 - $30,800).

2. This does not need any disclosure note. The estimated bad debt expense of $40,000 (2% of $2 million) will be accounted with appropriate allowance account.

3. This needs a disclosure note in the accounts as there is a contingent liability as on December 31.

4. This item also needs a disclosure note as there is a posibility of the company winning the case.

5. This also needs a disclosure note as there is a possibility of costs to the company.As the product recall seems unavoidable this fact needs a disclosure along withe the related cost to the company.

6. This does not need any disclosure as this is a normal business activity. The amount of expected cost $45,000 (6% of 10,000 times $25 minus $105,000) not accounted is to be accounted by creaing a liability.