Problem 1-Contingent liabilities
Following are three independent situations:
1. In August, 2012 a worker was injured in the factory in an accident partially the result of his own negligence. The worker has sued Wesley Co. for $800,000. Counsel believes it is reasonably possible that the outcome of the suit will be unfavorable and that the settlement would cost the company from $250,000 to $500,000.
2. A suit for breach of contract seeking damages of $2,400,000 was filed by an author against Greer Co. on October 4, 2012. Greer's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff is between $800,000 and $1,800,000. No amount within this range is a better estimate of potential damages than any other amount.
3. Quinn is involved in a pending court case. Quinn's lawyers believe it is probable that Quinn will be awarded damages of $1,000,000.
Discuss the proper accounting treatment, including any required disclosures, for each situation. Give the rationale for your answers.
Problem 2-Warranties
Jacson Equipment Company sells computers for $1,500 each and also gives each customer a 2 year warranty that requires the company to perform periodic services and to replace defective parts. During 2012, the company sold 900 computers. Based on past experience, the company has estimated the total 2-year warranty costs as $40 for parts and $60 for labor. Assume all sales occurred on December 31, 2012.
In 2013, Miley incurred actual warranty costs relative to 2012 computer sales of $12,000 for parts and $18,000 for labor.
Required: (journal entries)
a. Under the expense warranty approach, give the entries to reflect the above transactions (accrual method) for 2012 and 2013.
b. Under the cash-basis method, what are the warranty expense balances for 2012 and 2013?
c. As per the transactions of part (a) what balance would come under current liabilities in the 2012 balance sheet?
Answer all the questions in a Microsoft Word document.
Support your responses with examples.