The following selected transactions relate to contingencies of Classical Tool Makers, Incorporated, which began operations in July $2024.$ Classical$$s fiscal year ends on December $31.$ Financial statements are issued in April $2025.$

Classical's products carry a one$-$year warranty against manufacturer$$s defects. Based on previous experience, warranty costs are expected to approximate $4\%$ of sales. Sales were $$2$ million $($all credit$)$ for $2024.$ Actual warranty expenditures were $$30,800$ and were recorded as warranty expense when incurred.

Although no customer accounts have been shown to be uncollectible, Classical estimates that $2\%$ of credit sales will eventually prove uncollectible.

In December $2024,$ the state of Tennessee filed suit against Classical, seeking penalties for violations of clean air laws. On January $23,2025,$ Classical reached a settlement with state authorities to pay $$1\mathrm{.}5$ million in penalties.

Classical is the plaintiff in a $$4$ million lawsuit filed against a supplier. The suit is in final appeal and attorneys advise that it is virtually certain that Classical will win the case and be awarded $$2\mathrm{.}5$ million, an amount that is material to Classical.

In November $2024,$ Classical became aware of a design flaw in an industrial saw that poses a potential electrical hazard. A product recall appears unavoidable. Such an action would likely cost the company $$500,000.$

Classical offered $$25$ cash rebates on a new model of jigsaw. Customers must mail in a proof$-$of$-$purchase seal from the package plus the cash register receipt to receive the rebate. Experience suggests that $60\%$ of the rebates will be claimed. Ten thousand of the jigsaws were sold in $2024.$ Total rebates to customers in $2024$ were $$105,000$ and were recorded as promotional expense when paid.

Required:

$1-$a$.$ Prepare the year$-$end entries for any amounts that should be recorded as a result of each of the above contingencies.

$1-$b$.$ Indicate whether a disclosure note is needed for the above transactions.

Answer rating: 100% (QA)

1a Yearend entries for each of the contingencies 1 Warranty Provision Sales 2000000 Estimated warran... View the full answer