Tara Moses is the new manager of accounting and finance for a medium-sized manufacturing company. Now that the end of the year is approaching, her problem is determining whether and how to describe some of the company’s liabilities in the financial statements. The general manager, Serge Warack, raised objections to the treatment of one warranty estimate and a contingency in the preliminary proposal. First, Warack objected to the proposal to report nothing about a patent infringement suit that the company has filed against a competitor. Warack’s written comment on Tara’s proposal was, “We KNOW that we have them cold on this one! We’re almost guaranteed to win a very large settlement!” Second, he objected to Tara’s proposal to recognize an expense and a liability for warranty service on units of a new product that was just introduced in the company’s fourth quarter. His scribbled comment on this point was, “There is no way that we can estimate this warranty cost. Besides, we don’t owe anybody anything until the products break down and are returned for service. Let’s just report an expense if and when we do the repairs.”

Required

Develop a written response from Tara Moses regarding the objections raised by Serge Warack.