Question

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 uncollectible. 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 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 paid. Required: a. Prepare the year-end entries for any amounts that should be recorded as a result of each of the above contingencies. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)

Answer 1

Preparation of year-end entries of Classical Tool Makers Inc.,
		Debit($)	Credit($)	Calculations
1	Warranty expense	80000		2000000*4%
	Cash		30800
	Accrued warranty liability		49200	80000-30800
2	Provision for Bad debts(Under expenses)	40000
	Accounts receivable		40000	2000000*2%
3	Penalties(Under expenses)	1500000
	Penalties Payable(Under liabilites)		1500000
	(The financial statements are issued in April 2017
	So before closing known liability even though after
	completion of the year need to take in the books.
4	No Journal Entry. Since there is no certainity about
	winning the case cannot record in the books of accounts.
5	Product redesign expenses	500000
	Accrured product redesign liability		500000
	(Since the expense is unavoidable and knows that liability
	in Nov 2016 this liability need to be entered)
6	Promotional Expenses	250000		10000*25
	Cash		105000
	Promotional expenses payable		145000	250000-105000
	(As per the accrual concept of accounting book every known
	liability. Here the rebate is itself offered by classical tool makers
	Inc., and that amount need to be set side to pay off to the customers
	until the time limit for claiming expires)