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 2% of credit sales will eventually prove uncollectible. Sales were $295 million (all credit) for 2018.

2. Eastern offers a one-year warranty against manufacturer's defects for all its products. Industry experience indicates that warranty costs will approximate 3.00% of sales. Actual warranty expenditures were $3.40 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 poses a potential risk of injury. As a result, a product recall appears inevitable. This move would likely cost the company $1.49 million.

4. In November 2018, the State of Vermont filed suit against Eastern, asking civil penalties and injunctive relief for violations of clean water laws. Eastern reached a settlement with state authorities to pay $4.19 million in penalties on February 3, 2019.

5. Eastern is the plaintiff in a $39 million 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 $29 million.

Required:
Prepare the appropriate journal entries that should be recorded as a result of each of these 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

Sl No	Account details	Debit	Credit
1.	Bad debt expense	5900000
	Allowance for uncollectible accounts		5900000
	(2% x 295000000)
2.	Warranty expense	5450000
	Estimated warranty liability		5450000
	[(3% x $295000000) - $3400000]
3.	Loss from product recall	1490000
	Estimated liability - product recall		1490000
4.	Loss from litigation	4190000
	Litigation liability		4190000
5.	No entry required. This is a gain contingency. Gain contingencies are not accrued even if the gain is probable and reasonably estimable. The gain should be recognized only when realized. A disclosure note is appropriate.