Exercise 13-15 Warranties [LO13-5, 13-6]

Cupola Awning Corporation introduced a new line of commercial awnings in 2016 that carry a two-year warranty against manufacturers defects. Based on their experience with previous product introductions, warranty costs are expected to approximate 3% of sales. Sales and actual warranty expenditures for the first year of selling the product were:

Sales	Actual Warranty Expenditures
$5,000,000	$37,500

Required:

1.

Does this situation represent a loss contingency?

	No
	Yes

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 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

3.	What amount should Cupola report as a liability at December 31, 2016?