After expanding Smith Sales Company, Tom Smith asked you to become the controller of the company. Upon accepting the job, you realize that by offering a warranty on several products, Smith Sales Company could significantly raise revenues. Tom understands the benefits of offering warranties, but does not understand the accounting for them.

Requirements: (Part A: 50 points maximum; part B: 50 points maximum)

A. Explain to Tom:

1. The rational for accounting for contingent liabilities, and

2. The procedure for estimating and recording warranty expense.