Question

For all of the following – answer how this would be handled in the financial statements at December 31, 2019.

A.    Eastern offers a one-year warranty against manufacturer's defects for all its products. Industry experience indicates that warranty costs will approximate 2% of sales. Actual warranty expenditures were $3.5 million in 2019 and were recorded as warranty expense when incurred.

B.    In December, 2019, Eastern became aware of an engineering flaw in a product that poses a potential risk of injury. As a result, a product recall appears inevitable. This move would likely cost the company $1.5 million.

C.    Eastern is the plaintiff in a $40 million lawsuit filed against a customer for costs and lost profits from contracts rejected in 2019. The lawsuit is in final appeal and attorneys advise that it is virtually certain that Eastern will be awarded $30 million.

Answer 1

A. Provision should be made for warranty Expenses.

As instead they have booked the actual lose for this time period, so if the actual loss is less than the 2% than provision for this amount should be created & id actual loss is more than the estimate should be revised & according entry will be done.

B. Provision should be created for this Expense as the likelihood of loss is more. If likelihood was less than only disclosure in notes would be required.

C. This is an contingent gain & should be disclosed in the notes to Account. Note that It can not be recorded unless it is certain to be received.

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