The subsequent selected transactions relate to contingencies of Classical Tool Makers, Inc., which started operations in July 2013. Classical fiscal year ends on 31st December. Financial statements are issued in April 2014.
1. Classical's products carry a one-year warranty against manufacturer's defects. Based on past experience, warranty costs are expected to estimate 4% of sales. Sales were $2 million (all credit) for 2013. Real warranty expenditures were $30,800 and were recorded as guarantee expense when incurred.
2. Even no customer accounts have been shown to be uncollectible, Classical evaluates that 2% of credit sales will ultimately prove uncollectible.
3. In December 2013, the state of Tennessee filed suit against Classical, looking for penalties for violations of clean air laws. On 23rd January, 2014, Classical reached a settlement with state authorities to pay $1.5 million in penalties.
4. Classical is the plaintiff in a $4 million lawsuit filed against a supplier. The suit is in final appeal and attorneys give advice that it is virtually certain that Classical may win the case and be awarded $2.5 million.
5. In November 2013, Classical became aware of a design flaw in an industrial saying that poses a potential electrical hazard. A product recall seems unavoidable. Such an action could likely cost the company $500,000.
6. Classical presented $25 cash rebates on a new model of jigsaw. Customers must mail in a proof-of-purchase seal from the package plus the cash register receipt to get the rebate. Experience proposed that 60% of the rebates will be claimed. Ten thousand of the jigsaws were sold in 2013. Net rebates to customers in 2013 were $105,000 and were recorded as promotional expense when paid.
Required:
a. Prepare the year-end entries for any amounts that could be recorded as a result of each of the above contingencies. (If no entry is needed for a event, select "No journal entry needed" in the first account field.)