133. Panama Shirt Designs is a defendant in litigation involving an employee accident in its manufacturing plant.
For each of the following scenarios, determine the appropriate way to report the situation. Explain your reasoning and record any necessary entry.
1. The likelihood of a loss occurring is probable and the estimated loss is $650,000.
2. The likelihood of a loss occurring is probable and the loss is estimated to be in the range of $500,000 to $800,000.
3. The likelihood of a loss occurring is reasonably possible and the estimated loss is $650,000.
4. The likelihood of a loss occurring is remote, while the estimated potential loss is $650,000.
134. Rotary Tools sells power tools and backs each product it sells with a one-year warranty against defects. Based on previous experience, the company expects warranty costs to be approximately 5% of sales. By the end of the first year, sales and actual warranty expenditures are $800,000 and $13,000, respectively.
1. Does this situation represent a contingent liability? Why or why not?
2. Record warranty expense and warranty liability for the year based on 5% of sales.
3. Record the reduction in warranty liability for the actual warranty expenditures incurred during the year.
4. What is the balance in the Warranty Liability account after the entries in parts 2 and 3?