Jim Wilton is the accounting and finance manager for a manufacturer. At year-end he must determine how to account for the company's contingencies. His manager, Madeline Peters, objects to Wilton's proposal to recognize an expense and a liability for warranty service on units of a new product introduced in the fourth quarter. Peters comments, "There's no way we can estimate this warranty cost. We don't owe anyone anything until a product fails and it is returned. Let's report an expense if and when we do any warranty work."
1. Please prepare a response on behalf of Jim Wilton to Madeline Peters defending his proposal.