3. Managemelt $13 million is reasonably possible 4. Management feels an assessment is probable, and if an assessment is mau, S13 million is probable The following selected transactions relate to contingencies of Classical Tool Makers, Inc., which began operations in July 2018. Classical's fiscal year ends on December 31. Financial statements are issued in April 2019. Required: Prepare the year-end entries for any amounts that should be recorded as a result of each of these contingencies and indicate whether a disclosure note is indicated E 13-20 Various transactions involving contingencies warranty costs are expected to approximate 4% of sales. Sales were S2 million (all credit) for 2018, Actual 2. Although no customer accounts have been shown to be uncollectible, Classical estimates that 2% of credit 3. In December 2018, the state of Tennessee filed suit against Classical, seeking penalties for violations of clean Classical's products carry a one-year warranty against manufacturer's defects. Based on previous experience, warranty expenditures were $30,800 and were recorded as warr sales will eventually prove uncollectible. anty expense when incurred. air laws. On January 23, 2019, Classical reached a settlement with state authorities to pay $1.5 million in 4 Classical is the plaintiff in a $4 million lawsuit filed against a supplier. The suit is in final appeal and attor- 5. In November 2018, Classical became aware of a design flaw in an industrial saw that poses a potential elec- 6. Classical offered $25 cash rebates on a new model of jigsaw. Customers must mail in a proof-of-purchase neys advise that it is virtually certain that Classical will win the case and be awarded $2.5 million. trical hazard. A product recall appears unavoidable. Such an action would likely cost the company $500,000. seal from the package plus the cash register receipt to receive the rebate. Experience suggests that 60% of the were $105,000 and were recorded as promotional expense when paid. rebates will be claimed. Ten thousand of the jigsaws were sold in 2018. Total rebates to customers in 2018