Warranties and Contingent Liabilities Exercises

In a Word document, complete the following exercises:

Blackrock Paper, Inc. owns and operates a large pulp and paper mill in western Georgia. In late December 2010, as accountants are closing the books for the fiscal year, they note several outstanding legal issues. One issue is an Environmental Protection Agency (EPA) pending fine related to airborne emissions of dioxins and furans that occurred over a 3-year period. A second item involves a wrongful discharge case by a former employee who was terminated in August 2010. Lastly, a current employee has filed suit against the company for compensatory damages for a work-related injury incurred while operating equipment in the mill that was later found to be damaged. The employee is seeking damages on the order of $2,500,000.

Blackrock's legal counsel suggests that the EPA fine may total $5,500,000 but will not be settled within the next year. Counsel does not think there is substantial merit to the wrongful discharge case in which the former employee is suing for $1,500,000. The case involving the current employee is believed to have merit but might, in all likelihood, be settled out of court for $500,000 in the next 9 - 12 months.

Journalize the contingent liabilities that Blackrock Paper Inc. should recognize for this fiscal period.

Prepare a note to the financial statement that highlights both the nature of the contingent liability that was made in item 1 above, as well as any other related information that readers of the financial statements need.

What accounting standards relate to this scenario and provide guidance in the proper accounting for these contingencies?

Mogul Sports sells snowmobiles to customers in the Rocky Mountain region. Snowmobiles retail for $7,500 and come with a 2-year warranty. Mogul Sports has been in business for 3 years and has come to determine that the average warranty expense per snowmobile is $300. As the accountant for Mogul Sports, you are closing the books for September 2011. During the month of September, 75 snowmobiles were sold. Additionally, 4 snowmobiles came in during this same period for warranty repairs with a total of $950 in labor charges and $550 in parts.

Provide the following two journal entries:

1. Adjusting entry for warranty expense for the period

2. Adjusting entry for warranty repairs provided during the month