The following selected transactions relate to contingencies of Eastern Products
ID: 2554050 • Letter: T
Question
The following selected transactions relate to contingencies of Eastern Products Inc, which began operations in July 2018. Eastern's fiscal year ends on December 31. Financial statements are published in April 2019. 1. No customer accounts have been shown to be uncollectible as yet, but Eastern estimates that 3% of credit sales will eventua prove uncollectible. Sales were $285 million (all credit) for 2018 year warranty against manufacturer's defects for all its products. Industry experience indicates that warranty s will approximate 2.50% of sales. Actual warranty expenditures were $3.20 million in 2018 and were recorded as warranty expense when incurred. 3 In December 2018, Eastern became aware of an engineering flaw in a product that 4 In November 2018, the State of Vermont filed suit against Eastern, asking poses a potential risk of injury As a result, a product recall appears inevitable. This move would likely cost the company $1.47 million tern, asking civil penalties and injunctive relief for violations of clean ater laws. Eastern reached a settlement with state authorities to pay $417 million in penalties on February 3, 2019 5. Eastern is the plaintif in a $37 milion lawsuit filed against a customer for costs and lost profits from contracts rejected in 2018. The lawsuit is in final appeal and attorneys advise that it is virtually certain that Eastern will be awarded $27 million.Explanation / Answer
Solution:
Particulars
Debit
Credit
1
Bad debt expense
8,550,000
Allowance for uncollectible accounts
8,550,000
(3% * 285,000,000)
2
Warranty expense
2,500,000
Estimated warranty liability
2,500,000
(2% * 285,000,000) - 3,200,000
3
Loss from product recall
1,470,000
Estimated liability-product recall
1,470,000
4
Loss from litigation
4,170,000
Litigation liability
4,170,000
5
No entry
Explanation: . Gain contingencies are not accrued even when the gain is probable and can be reasonably estimated. The gain must be recognized only when realized. A disclosure note will be appropriate.
Particulars
Debit
Credit
1
Bad debt expense
8,550,000
Allowance for uncollectible accounts
8,550,000
(3% * 285,000,000)
2
Warranty expense
2,500,000
Estimated warranty liability
2,500,000
(2% * 285,000,000) - 3,200,000
3
Loss from product recall
1,470,000
Estimated liability-product recall
1,470,000
4
Loss from litigation
4,170,000
Litigation liability
4,170,000
5
No entry
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