Fusion, Inc. introduced a new line of circuits in 2009 that carry a four-year warranty against manufacturer's defects. Based on their experience with previous product introductions, warranty costs are expected to approximate 3% of sales. Sales and actual warranty expenditures for the first year of selling the product were:
Required:
1. Does this situation represent a loss contingency? Why or why not? How should it be accounted for?
2. Prepare journal entries that summarize sales of the circuits (assume all credit sales) and any aspects of the warranty that should be recorded during 2009.
3. What amount should Fusion report as a liability at December 31, 2009?
$$\begin{array} { c c }
{ \text { Actual warranty } } \
\text { Sales } & \text { Expenditures } \
\$ 15 \text { million } & \$ 200,000
\end{array}$$

Question

Fusion, Inc. introduced a new line of circuits in 2009 that carry a four-year warranty against manufacturer's defects. Based on their experience with previous product introductions, warranty costs are expected to approximate 3% of sales. Sales and actual warranty expenditures for the first year of selling the product were:
Required:
1. Does this situation represent a loss contingency? Why or why not? How should it be accounted for?
2. Prepare journal entries that summarize sales of the circuits (assume all credit sales) and any aspects of the warranty that should be recorded during 2009.
3. What amount should Fusion report as a liability at December 31, 2009?
 $$\begin{array} { c c } 
 { \text { Actual warranty } } \
\text { Sales } & \text { Expenditures } \
\$ 15 \text { million } & \$ 200,000
\end{array}$$

Quizplus · Accepted Answer

The Answer of Fusion, Inc. introduced a new line of circuits in 2009 that carry a four-year warranty against manufacturer's defects. Based on their experience with previous product introductions, warranty costs are expected to approximate 3% of sales. Sales and actual warranty expenditures for the first year of selling the product were:
Required:
1. Does this situation represent a loss contingency? Why or why not? How should it be accounted for?
2. Prepare journal entries that summarize sales of the circuits (assume all credit sales) and any aspects of the warranty that should be recorded during 2009.
3. What amount should Fusion report as a liability at December 31, 2009?
 $$\begin{array} { c c } 
 { \text { Actual warranty } } \
\text { Sales } & \text { Expenditures } \
\$ 15 \text { million } & \$ 200,000
\end{array}$$

Fusion, Inc Actual warranty Sales Expenditures $15 million $200,000\begin{array} { c c } { \text { Actual warranty } } \\\text { Sales } & \text { Expenditures } \\\$ 15 \text { million } & \$ 200,000\end{array} Actual warranty Sales $15 million ​ Expenditures $200,000​

Fusion, Inc $\begin{array} { c c } { \text { Actual warranty } } \\\text { Sales } & \text { Expenditures } \\\$ 15 \text { million } & \$ 200,000\end{array}$