Intermediate Accounting Exam1

Topics: Lease, Leasing, Renting Pages: 3 (719 words) Published: August 19, 2013
The following selected transactions relate to contingencies of Eastern Products Inc. which began operations in July of Year 1. Eastern's fiscal year ends on December 31. Financial statements are published in April of Year 2.

Required:
Prepare the appropriate journal entries that should be recorded as a result of each of these contingencies. If no journal entry is indicated, state why.

1. No customer accounts have been shown to be uncollectible as yet, but Eastern estimates that 3% of credit sales will eventually prove uncollectible. Sales were $300 million (all credit) for Year 1.

2. Eastern offers a one-year warranty against manufacturer's defects for all its products. Industry experience indicates that warranty costs will approximate 2% of sales. Actual warranty expenditures were $3.5 million in Year 1 and were recorded as warranty expense when incurred.

3. In December, Eastern became aware of an engineering flaw in a product that poses a potential risk of injury. As a result, a product recall appears inevitable. This move would likely cost the company $1.5 million.

4. In November, the State of Vermont filed suit against Eastern, asking civil penalties and injunctive relief for violations of clean water laws. Eastern reached a settlement with state authorities to pay $4.2 million in penalties in February of Year 2.

5. Eastern is the plaintiff in a $40 million lawsuit filed against a customer for costs and lost profits from contracts rejected in Year 1. The lawsuit is in final appeal and attorneys advise that it is virtually certain that Eastern will be awarded $30 million.

Yummy Rice Cereal offers a cereal bowl in exchange for 3 return box tops. Yummy Rice estimates that 30% will be redeemed. The bowls cost Yummy Rice $1 each. In Year 1, 5,000,000 boxes of cereal were sold. By year-end, 900,000 box tops had been redeemed.

Required:
Calculate the liability that Yummy Rice...
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