Question 2

A. Miley Company is involved in a lawsuit brought by former employees. The employees are suing for a recovery of $350,000 for injury at work. The legal advisor is quite pessimistic about the lawsuit and believes that it is probable (more likely than not) that the company will lose the litigation and pay the full amount of the claim. Required: Discuss the proper accounting treatment, including any required disclosure, for Miley Company regarding the above ongoing litigation (no journal entry is required).

B. Miley Company sells computers for $1,500 each and gives each computer a two-year assurance-type warranty that requires the company to perform periodic maintenance services and to replace defective parts.

On December 31, 2018, the company sold 700 computers on account.

The computers sold have a cost of $1,000 each. The company adopts a perpetual inventory system.

Based on past experience, the company has estimated that the total 2-year warranty costs for each computer are $90.

In 2018, Miley Company incurred none warranty costs related to the 2018 computer sales.

The fiscal year-end is December 31.

Required: Prepare the journal entries for Miley Company on December 31, 2018.