Written Communication AP8-7 Western Manufacturing is involved with several poten
ID: 2517625 • Letter: W
Question
Written Communication AP8-7 Western Manufacturing is involved with several potential contingent liabilities. Your assignment is to draft the appropriate accounting treatment for each situation described below. Western's fiscal year-end is December 31, 2018, and the financial statements will be issued in early February 2019 a. During 2018, Western experienced labor disputes at three of its plants. Management hopes an agreement will soon be reached. However negotiations between the company and the unions have not produced an acceptable settlement, and employee strikes are currently under way. It is virtually certain that material costs will be incurred, but the amount of possible costs cannot be reasonably estimated b. Western warrants most products it sells against defects in materials and workmanship for a period of a year. Based on its experience with previous product introductions, warranty costs are expected to approximate 2% of sales. Anew product introduced in 2018 had sales of $2 million, and actual warranty expenditures incurred so far on the product are $25,000. The only entry made so far relating to warranties on this new product was to debit Warranty Expense $25,000 and credit Cash $25,000. c. Western is involved in a suit filed in January 2019 by Crump Holdings seeking $88 million, as an adjustment to the purchase price in connection with the company's sale of its textile business in 2018. The suit alleges that Western misstated the assets and liabiliies used to calculate the purchase price for the textile division. Legal counsel advises that it is reasonably possible that Western could lose up to $88 million Required in a memo, describe the appropriate means of reporting each situation and explain your reasoningExplanation / Answer
a.
As the labor dispute will result in material costs but the los cannot be reasonably estimated, this requires a disclosure in the notes to accounts.
b.
As the company has a warranty policy of warranty of one year against defects in materials and workmanship, and since the waranty liabilitiy can be reasonably estimated to be $40,000(2% of $2,000,000) and since the company has already paid warranty expense of $25,000 during the year the balance $15,000($40,000 - $25,000) is to be provided for wit the following journal entry.
c.
In this case, since the legal counsel advises that it is reasonably possible that the company could lose upto $88 million , an entry shall be recorded in the books as follows.
Account Title Debit Credit Warranty expenses 15000 Warranty liability 15000Related Questions
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