Cupola Awning Corporation introduced a new line of commercial awnings in 2011 that carry a two-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 Cupola account for it?

2. Prepare journal entries that summarize sales of the awnings (assume all credit sales) and any aspects of the warranty that should be recorded during 2011.

3. What amount should Cupola report as a liability at December 31, 2011?