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Exercise 1 3 - 2 0 ( Algo ) Various transactions involving contingencies; disclosures [ LO 1 3 - 5 , 1 3 - 6
Exercise Algo Various transactions involving contingencies; disclosures LO
The following selected transactions relate to contingencies of Classical Tool Makers, Incorporated, which began operations in July
Classical's fiscal year ends on December Financial statements are issued in April
Classical's products carry a oneyear warranty against manufacturer's defects. Based on previous experience, warranty costs are
expected to approximate of sales. Sales were $ million all credit for Actual warranty expenditures were $
and were recorded as warranty expense when incurred.
Although no customer accounts have been shown to be uncollectible, Classical estimates that of credit sales will eventually
prove uncollectible.
In December the state of Tennessee filed suit against Classical, seeking penalties for violations of clean air laws. On
January Classical reached a settlement with state authorities to pay $ million in penalties.
Classical is the plaintiff in a $ 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 $ million, an amount that is material to Classical.
In November 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 $
Classical offered $ cash rebates on a new model of jigsaw. Customers must mail in a proofofpurchase seal from the package
plus the cash register receipt to receive the rebate. Experience suggests that of the rebates will be claimed. Eleven
thousand and nine hundred of the jigsaws were sold in Total rebates to customers in were $ and were
recorded as promotional expense when paid.
Required:
a Prepare the yearend entries for any amounts that should be recorded as a result of each of the above contingencies.
b Indicate whether a disclosure note is needed for the above transactions.
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