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Chapter 11: Q14RQ (page 604)
Curtis Company is facing a potential lawsuit. Curtis’s lawyers think that it is reasonably possible that it will lose the lawsuit. How should Curtis report this lawsuit?
Reasonable possible contingent liability is recorded in the notes to the financial statement.
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The following transactions of Philadelphia Pharmacies occurred during 2017 and 2018:
2017
Jan. 9 Purchased computer equipment at a cost of \(7,000, signing a six-month, 8% note payable for that amount.
29 Recorded the week’s sales of \)68,000, three-fourths on credit and one-fourth for cash. Sales amounts are subject to a 6% state sales tax. Ignore cost of goods sold.
Feb. 5 Sent the last week’s sales tax to the state.
Jul. 9 Paid the six-month, 8% note, plus interest, at maturity.
Aug. 31 Purchased merchandise inventory for \(3,000, signing a six-month, 10% note payable. The company uses the perpetual inventory system.
Dec. 31 Accrued warranty expense, which is estimated at 2% of sales of \)609,000.
31 Accrued interest on all outstanding notes payable.
2018
Feb. 28 Paid the six-month 10% note, plus interest, at maturity.
Journalize the transactions in Plymouth’s general journal. Explanations are not required.
What is contingent liability? Provide some examples of contingencies.
Accounting for warranty expense and warranty payable
The accounting records of Sculpted Ceramics included the following at January 1, 2018:
Estimated Warranty Payable | |
5,000 Beg. Bal |
In the past, Sculpted’s warranty expense has been 9% of sales. During 2018, Sculpted made sales of \(113,000 and paid \)7,000 to satisfy warranty claims. Requirements
Erin O’Neil Associates reported short-term notes payable and salaries payable as follows:
2018 | 2017 | |
Current Liabilities—partial: | ||
Short-term Notes Payable | \(16,900 | \) 16,000 |
Salaries Payable | 3,400 | 4,000 |
During 2018, O’Neil paid off both current liabilities that were left over from 2017, borrowed cash on short-term notes payable, and accrued salaries expense. Journalize all four of these transactions for O’Neil during 2018. Assume no interest on short-term notes payable of $16,000.
When do businesses record warranty expenses, and why?
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