Required: Prepare the appropriate journal entries that should be recored as a result of each of these contingencies. If no journal entry is indicated, state why sheet?
The following selected transactions relate to contingencies of Curtis Products Inc., which began operations in July 2013. Curtis' fiscal year ends on December 31. Financial statements are published in April 2014.
1. No customer accounts have been shown to be uncollectible as yet, but Curtis estimates that 3% of credit sales will eventually prove uncollectible. Sales were $300 Million (all credit) for 2013.
2. Curtis offers a one-year warranty against manufacturer's defects for all its products. Industry experience indicates that warranty costs will approximate 2% of sales. Actual warranty expenditures were $3.5 million in 2013 and were recorded as warranty expense when incurred.
3. In December 2013, Curtis became aware of an engineering flaw in a product that poses a potential risk of injury. As a result, a product recall appears inevitable. This move would likely cost the company $1.5 Million.
4. In November 2013, the State of Vermont filed suit against Curtis, asking civil penalties and injunctive relief for violations of clean water laws. Curtis reached a settlement with state authorities to pay $4.2 million in penalties on February 3, 2014.
5. Curtis sis the plaintiff in a $40 million law suit filed against a customer fo rcosts and lost profits from contracts rejected in 2013. The lawsuit is in final appeal and attorneys advise that it is virtually certain that Curtis will be awarded $30 Million.