ABC Corporation is drafting its first set of financial statements for the fiscal year ending December 31, 2020, as well as the necessary adjustment entries. The following transactions and events are among the contingent losses under consideration.
1. During the year, ABC provides a one-year warranty on two of its most popular product lines (both labor and parts cost). There were $20,000 in sales of these products. Warranty costs are typically around 4% of the sales price. The warranty is classified as an assurance warranty.
2. A consumer sued ABC for $300,000 after an accident at a retail store. According to legal advice, the plaintiff is probably to win in court and ABC will be obligated to pay 10% of the claim; the insurance company is expected to cover the rest. The litigation is expected to end in mid-2021.
3. ABC Corporation endorsed and guaranteed a$18,000, 14%, one-year mortgage note given by a local supplier of merchandise to ABC. The bank required a guarantor. The bank indicated that the probability of default by the supplier was reasonably possible.
4. ABC Corporation's comprehensive liability insurance policy covers any claims for damages to individuals or groups caused by accident, carelessness, or other injuries linked to the company's legitimate operations. However, the insurance policy has an escape clause that states, "When the insured is willfully negligent, as determined by an independent third party, the insured must pay 10% of the loss." ABC Corporation's payment under the escape clause is seen as remote.
5. A gain on the sale of equipment is virtually certain and its amount can be reasonably estimated at $5,000
6. Required
7. a. Evaluate each of the above transactions and events and recommend appropriate accounting and reporting
8. actions for the 2020 financial statements. Provide any entry or disclosure required for each item.
9. b. Identify each liability and the amount that should be reported on the December 31, 2020, balance sheet.
10. Required
11. a. Evaluate each of the above transactions and events and recommend appropriate accounting and reporting
12. actions for the 2020 financial statements. Provide any entry or disclosure required for each item.
13. b. Identify each liability and the amount that should be reported on the December 31, 2020, balance sheet.
Required
1. 1. Evaluate each of the aforementioned transactions and events and provide recommendations for the 2020 financial statements' accounting and reporting treatment.
2. 2. Identify each liability and the associated amount that should be shown on the balance sheet as of December 31, 2020
