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Exercise 1 3 - 2 0 ( Algo ) Various transactions involving contingencies; disclosures [ LO 1 3 - 5 , 1 3 - 6

Exercise 13-20(Algo) Various transactions involving contingencies; disclosures [LO13-5,13-6]
The following selected transactions relate to contingencies of Classical Tool Makers, Incorporated, which began operations in July
Classical's fiscal year ends on December 31. Financial statements are issued in April 2025.
Classical's products carry a one-year warranty against manufacturer's defects. Based on previous experience, warranty costs are
expected to approximate 2% of sales. Sales were $3.9 million (all credit) for 2024. Actual warranty expenditures were $32,700
and were recorded as warranty expense when incurred.
Although no customer accounts have been shown to be uncollectible, Classical estimates that 2% of credit sales will eventually
prove uncollectible.
In December 2024, the state of Tennessee filed suit against Classical, seeking penalties for violations of clean air laws. On
January 23,2025, Classical reached a settlement with state authorities to pay $3.4 million in penalties.
Classical is the plaintiff in a $5.9 million lawsuit filed against a supplier. The suit is in final appeal and attorneys advise that it is
virtually certain that Classical will win the case and be awarded $4.4 million, an amount that is material to Classical.
In November 2024, Classical became aware of a design flaw in an industrial saw that poses a potential electrical hazard. A
product recall appears unavoidable. Such an action would likely cost the company $690,000.
Classical offered $25 cash rebates on a new model of jigsaw. Customers must mail in a proof-of-purchase seal from the package
plus the cash register receipt to receive the rebate. Experience suggests that 70% of the rebates will be claimed. Eleven
thousand and nine hundred of the jigsaws were sold in 2024. Total rebates to customers in 2024 were $124,000 and were
recorded as promotional expense when paid.
Required:
1-a. Prepare the year-end entries for any amounts that should be recorded as a result of each of the above contingencies.
1-b. Indicate whether a disclosure note is needed for the above transactions.
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