Understanding Loss Contingencies, Warranties, and Subsequent

School: University of Illinois, Urbana Champaign - Course: ACCY 303 - Subject: Accounting

ACCY 303 January 25, 2023 Class #3: Contingencies; Subsequent Events; Unasserted Claims Loss contingencies review Warranties Gain contingencies Subsequent events Unasserted claims Connect homeworkdue Monday,1/30,8 am
Loss Contingencies (Review) Aloss contingencyis anexisting,uncertain situation involving apotential lossdepending on a future event. Two factors determine the accounting treatment: Likelihood: Probable (=likely) Reasonably possible Remote (=slight) Amount:Reasonably estimable Cannot estimate
Contingent Liabilities: Warranties Whydo werecognizewarranties? Whenshould warranties be recognized? Matching principle
Warranty Example Smith Inc. introduced a new line of doors in 2018. The doors carry atwo-yearwarranty against manufacturer's defects. Warranty costs are expected to approximate2% of sales in the first year and3%in the second year. Sales and actual warranty expenditures for thefirst yearof selling the product were: SalesActual Warranty Expenditures $5,000,000$130,000 Required: What amount should Smith report as a warranty reserve liability on 12/31/2018?

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