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 are $800,000. Actual warranty expenses incurred so far are $13,000.1. 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 actual warranty expenditures of $13,000 incurred so far.4. What is the balance in the Warranty Liability account after the entries in parts 2 and 3?
What will be an ideal response?
1. Yes, it's probable that costs for warranties will be incurred and based on previous experience the company can reasonably estimate the amount.
2.
| Warranty Expense ($800,000 × 5%) | 40,000 | ? |
| Warranty Liability | ? | 40,000 |
3.
| Warranty Liability | 13,000 | ? |
| Cash | ? | 13,000 |
4.
| Warranty Liability |
| Payment $13,000 | $40,000 Expense |
| ? | $27,000 Balance |
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What will be an ideal response?
Product/market objectives may be expressed in terms of:
a. profitability, market share, and cash flow b. profitability, market share, and growth c. profitability, growth, and return on investment d. all of the above e. none of the above