Leisure Luggage manufactures a line of luggage designed for airline travel. Assume the following transactions occur during the year ended December 31, 2021. Required: Record any amounts as a result of each of these contingencies. 1. In November 2021, Leisure Luggage became aware of a design flaw in one of its lines of luggage. A product recall is probable and is estimated to cost the company between $300,000 and $500,000.2. Leisure Luggage is the defendant in a patent infringement lawsuit brought by a competitor. It appears reasonably possible Leisure Luggage will lose the case, and potential losses are estimated to be $1.2 million.3. Credit sales were $12 million for 2021. Although no customer accounts have been shown to be uncollectible, the company estimates that 3% of credit sales
will eventually prove uncollectible.4. Leisure Luggage is the plaintiff in a lawsuit filed against a supplier. The suit is in final appeal, and attorneys advise it is virtually certain that Leisure Luggage will win and be awarded $800,000.
What will be an ideal response?
Requirement 1
| Loss | 300,000 | ? |
| Contingent Liability | ? | 300,000 |
Requirement 2
The likelihood of loss is reasonably possible rather than probable, so no journal entry is recorded. However, full disclosure of the contingent liability and the estimated loss of $1.2 million is disclosed in notes to the financial statements.
Requirement 3
| Bad Debt Expense ($12 million × 3%) | 360,000 | ? |
| Allowance for Uncollectible Accounts | ? | 360,000 |
Requirement 4
Leisure Luggage has a contingent gain that is probable and is reasonably estimable; however, contingent gains are not recorded until the gain is certain. Though firms do not record contingent gains in the accounts, they sometimes disclose them in notes to the financial statements.
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Fill in the blank(s) with correct word
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