Duplot Awning Corporation introduced a new line of commercial awnings in year 1 that carry a two- year warranty against manufacturers defects. Based on their experience with previous product introductions, warranty costs are expected to approximate 2% of sales. Sales and actual warranty expenditures for the first year of selling the product were:

Sales = $4,361,000

Actual Warranty Expenditures = $21,805

Required:

1. Does this situation represent a loss contingency? Why or why not? How should Duplot account for it?

2. Prepare journal entries that summarize sales of the awnings (assume all credit sales) and any aspects of the warranty that should be recorded during year 1.

3. What amount should Duplot report as a liability at December 31, year 1?