Question : 135. Decorative Concrete produces a concrete overlay for residential and commercial : 1236233

135. Decorative Concrete produces a concrete overlay for residential and commercial concrete flooring. Customers have complained that one of the products results in excessive cracking. The likelihood the company will incur a loss on this product is probable and the amount of the loss is estimated to be somewhere between $1.5 and $3 million.

1. Should this contingent liability be reported, disclosed in a note only, or both? Explain.
2. What loss, if any, should Decorative Concrete report in its income statement?
3. What liability, if any, should Decorative Concrete report in its balance sheet?
4. What entry, if any, should be recorded?
 

1. The contingent liability is probable and reasonably estimable, so it must be reported. The details of the contingent liability should also be provided in a note to the financial statements.
2. When the loss is estimated within a range, the minimum amount of the loss, $1.5 million, should be reported in its 2012 income statement.
3. Similarly, a $1.5 million liability should be reported in its 2012 balance sheet.
4. The journal entry is as follows:

136. Panama Shirt Designs is a defendant in litigation involving an employee accident in its manufacturing plant.
For each of the following scenarios, determine the appropriate way to report the situation. Explain your reasoning and record any necessary entry.

1. The likelihood of a loss occurring is probable and the estimated loss is $650,000.
2. The likelihood of a loss occurring is probable and the loss is estimated to be in the range of $500,000 to $800,000.
3. The likelihood of a loss occurring is reasonably possible and the estimated loss is $650,000.
4. The likelihood of a loss occurring is remote, while the estimated potential loss is $650,000.

1. The contingent liability is probable and reasonably estimable, so it must be recorded as follows:

2. Panama Shirt Designs should record a loss and a liability for the minimum amount ($500,000)
and disclose the range between $500,000 and $800,000 in the footnotes to the financial statements. The journal entry is as follows:

3. If the likelihood of loss is reasonably possible rather than probable, we record no entry, but
make full disclosure in a footnote to the financial statements to describe the contingency.
4. If the likelihood of loss is remote, disclosure is usually not required.

137. Rotary Tools sells power tools and backs each product it sells with a one-year warranty against defects. Based on previous experience, the company expects warranty costs to be approximately 5% of sales. By the end of the first year, sales and actual warranty expenditures are $800,000 and $13,000, respectively.

1. Does this situation represent a contingent liability? Why or why not?
2. Record warranty expense and warranty liability for the year based on 5% of sales.
3. Record the reduction in warranty liability and the reduction in cash of $13,000 incurred during the year.
4. What is the balance in the Warranty Liability account after the entries in parts 2 and 3?

1. Yes, it’s probable that costs for warranties will be incurred and based on previous experience the company can reasonably estimate the amount.

2.   

3.   

4.