1.) Yes or No 2.) Yes or No 3.) Yes or No 4.) Yes or No 5.) Yes or No 6.) Yes or
ID: 2585848 • Letter: 1
Question
1.) Yes or No
2.) Yes or No
3.) Yes or No
4.) Yes or No
5.) Yes or No
6.) Yes or No
The following selected transactions relate to contingencies of Classical Tool Makers, Inc., which began operations in July 2016. Classical's fiscal year ends on December 31. Financial statements are issued in April 2017 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 million (all credit) for 2016. Actual warranty expenditures were $30,800 and were recorded as warranty expense when incurred 2. Although no customer accounts have been shown to be uncollectible, Classical estimates that 2% of credit sales will eventually prove un collectible 3. In December 2016, the state of Tennessee filed suit against Classical, seeking penalties for violations of clean air laws. On January 23, 2017, Classical reached a settlement with state authorities to pay $1.5 million in penalties. 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 is virtually certain that Classical will win the case and be awarded $2.5 million 5. In November 2016, Classical became aware of a design flaw in an industrial saw that poses a potential electrical hazard. A product recall appears unavoidable. Such an action would likely cost the company $500,000 6. Classical offered $25 cash rebates on a new model of jigsaw. Customers must mail in a proof-of purchase seal from the package plus the cash register receipt to receive the rebate. Experience suggests that 60% of the rebates will be claimed. Ten thousand of the jigsaws were sold in 2016, Total rebates to customers in 2016 were $105,000 and were recorded as promotional expense when paidExplanation / Answer
1. Warranty Expenses
Provision for warranty expenses :-
a) Warrany Expenses ...Dr. $80,000
To Estimated warranted liability a/c $ 80,000
($ 2million *4% = $80,000- Being provision created for warranty expenses)
b) Actual warranty expenses
Estimated Warranty liability a/c ......Dr. $30,800
To Classical products inventory a/c. $ 30,800
2. Provision for Doubtful debts
Profit and loss a/c Dr. $ 40,000
To Provision for doubtful debts a/c. $ 40,000
($ 2m *2%)
3. Payment of penalty - Exceptional items.
Profit and loss a/c Dr. $ 1.5m
To Bank a/c $ 1.5 m
(Being penalty expenses paid)
4.No entry
5. Product recall
Profit and loss account a/c Dr. $ 500,000
To Warranty Cost a/c $ 500,000
(Being expenses on product recall reorded)
Also sales need to be reversed for actual sales value.
6. Rebate
a) Profit and loss account a/c Dr. $150,000
To provision for promotional expenses a/c $ 150,000
b) Provision for promotional expense a/c Dr. $ 105,000
To Promotional expenses a/c $ 105,000
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