Question
Describe the appropriate accounting means of reporting each situation and explain your reasoning. Your task is to prepare the appropriate accounting treatment for each of
Describe the appropriate accounting means of reporting each situation and explain your reasoning.
Your task is to prepare the appropriate accounting treatment for each of the scenarios outlined below. It is important to note that Feller's fiscal year ends on December 31, 2020, and the financial statement will be released in early February 2021.
a. In 2020, Feller faced labor disputes at three of its plants. The management is optimistic that an agreement will be reached soon. However, the negotiations between the company and the unions have failed to produce an acceptable settlement, leading to ongoing employee strikes. It is highly likely that there will be material costs, but the exact amount cannot be accurately estimated..
b. Feller offers a one-year warranty on most of its products, covering defects in materials and workmanship. The company estimates that warranty costs will be approximately 2% of sales, based on past product introductions. In 2020, Feller introduced a new product with sales totaling $2 million. To date, the company has incurred $25,000 in actual warranty expenditures for this product. The only recorded transaction related to warranties on this new product was a debit of $25,000 to Warranty Expense and a credit of $25,000 to Cash.
c. There is a lawsuit currently underway involving Feller, which was filed in January 2021 by Crump Holdings. The suit seeks an adjustment of $88 million to the purchase price regarding the sale of Feller's textile business in 2020. The accusation is that Feller provided misleading information regarding the assets and liabilities used to calculate the purchase price for the textile division. Legal counsel has advised that it is reasonably possible for Feller to lose up to $88 million.
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