Darina Georgieva

Exercise 13-11

Requirement 1

This is a loss contingency. There may be a future sacrifice of economic benefits (cost of satisfying the warranty) due to an existing circumstance (the warranted awnings have been sold) that depends on an uncertain future event (customer claims).

The liability is probable because product warranties inevitably entail costs. A reasonably accurate estimate of the total liability for a period is possible based on prior experience. So, the contingent liability for the warranty is accrued. The estimated warranty liability is credited and warranty expense is debited in 2009, the period in which the products under warranty are sold.

Requirement 2

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2009 Sales

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Accounts receivable 5,000,000

Sales 5,000,000

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Accrued liability and expense

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Warranty expense (3% x $5,000,000) 150,000

Estimated warranty liability 150,000

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Actual expenditures

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Estimated warranty liability 37,500

Cash, wages payable, parts and supplies, etc. 37,500

Requirement 3

Warranty Liability

150,000 Estimated liability

Actual expenditures 37,500

112,500 Balance

Problem 13-12

Requirement 1

Calculation of frequent flyer liability:

Transit’s frequent flyer program is offered in order to enhance revenues. Under the matching principle, the cost is properly recognized as an operating expense in the year sales are made (travel miles are earned). The 2009 expense is: 30% x $90 million = $27 million. The year-end liability is:...