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:
Sales
$5,000,000
Required:
Does this situation represent a loss contingency? Why or why not? How should Cupola account for it?
Prepare a journal entries that summarize sales of the awnings (assume all lcredit sales) and any aspects of the warranty that should be recorded during 2011.
What amount should Cupola report as a liability at December 31, 2011.