P13-14B (LO 5) (Warranty and Coupon Computation) Thompson Company must make computations and adjusting entries for the following two independent situations at December 31, 2021. 1. Its line of copier machines carries a 3-year warranty against defects. On the basis of past experience the estimated war- ranty costs related to dollar sales are: first year after sale-1% of sales; second year after sale4% of sales; and third year after sale-6% of sales. Sales and actual warranty expenditures for the first 3 years of business were: 2019 2020 2021 Sales $2,650,000 2,400,000 3,060,000 Warranty Expenditures $ 42,000 156,200 183,900 Instructions Compute the amount that Thompson Company should report as a liability in its December 31, 2021, balance sheet. Assume that all sales are made evenly throughout each year with warranty expenses also evenly spaced relative to the rates above. 2. With some of its products, Thompson Company includes coupons that are redeemable in merchandise. The coupons have no expiration date and, in the company's experience, 60% of them are redeemed. The liability for unredeemed coupons at December 31, 2020, was $21,000. During 2021, coupons worth $61,000 were issued, and merchandise worth $34,600 was distributed in exchange for coupons redeemed. Instructions Compute the amount of the liability that should appear on the December 31, 2021, balance sheet. (AICPA adapted) P13.13B (LO 3) (Liability Errors) You are the independent auditor engaged to audit Sequoia Corporation's December 31, 2020, financial statements. Sequoia manufactures small appliances During the course of your audit, you discovered the follow- ing contingent liabilities. 1. Sequoia began production of a new blender in August 2020 and, by December 31, 2020, sold 381,000 to various retailers for $60 each. Each blender is under a one-year warranty. The company estimates that its warranty expense per blender will amount to $4. At year-end, the company had already paid out $831,000 in warranty expenses. Sequoia's income statement shows warranty expenses of $831,000 for 2020. Sequoia accounts for warranty costs on the accrual basis. 2. Sequoia is the defendant in a patent infringement lawsuit by Crusher Blenders, Inc. over Sequoia's use of a blade design and ice crushing technique in its new blender. Sequoia's general counsel claims that, if the suit goes against Sequoia, the loss would be approximately $25,000,000; however, their attorney believes the loss of this suit to be only reasonably possible. Again, no mention of this suit is made in the financial statements. 3. In response to your attorney's letter, Sequoia's general counsel has informed you that Sequoia has been cited for burying toxic chemicals behind one of the plants. Clean-up costs and fines amount to $4,200,000. Although the case is still being contested, their attorney is certain that Sequoia will most probably have to pay at least $3,500,000 of the fine and clean-up costs. No disclosure of this situation was found in the financial statements. As presented, these contingencies are not reported in accordance with GAAP, which may create problems in issuing a favorable audit report. You feel the need to note these problems in the work papers. Instructions Heading each page with the name of the company, balance sheet date, and a brief description of the problem, write a brief nar- rative for each of the above issues in the form of a memorandum to be incorporated in the audit work papers. Explain what led to the discovery of each problem, what the problem really is, and what you advised your client to do (along with any appropri- ate journal entries) in order to bring these contingencies in accordance with GAAP