The Following Selected Transactions Relate to Contingencies of Eastern Products

question 31

Essay

The following selected transactions relate to contingencies of Eastern Products Inc. which began operations in July, 2009. Eastern's fiscal year ends on December 31. Financial statements are published in April, 2010.
1. No customer accounts have been shown to be uncollectible as yet, but Eastern estimates that 3% of credit sales will eventually prove uncollectible. Sales were $300 million (all credit) for 2009.
2. Eastern 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 2009 and were recorded as warranty expense when incurred.
3. In December, 2009, Eastern 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, 2009, the State of Vermont filed suit against Eastern, asking civil penalties and injunctive relief for violations of clean water laws. Eastern reached a settlement with state authorities to pay $4.2 million in penalties on February 3, 2010.
5. Eastern is the plaintiff in a $40 million lawsuit filed against a customer for costs and lost profits from contracts rejected in 2009. The lawsuit is in final appeal and attorneys advise that it is virtually certain that Eastern will be awarded $30 million.
Required:
Prepare the appropriate journal entries that should be recorded as a result of each of these contingencies. If no journal entry is indicated, state why.

Understand the relationship between current full cost, profit margin, and target selling price.

Comprehend the impact of fixed and variable costs on product pricing.

Analyze profit margin changes when cost reduction is not possible.

Understand the concept of markup percentages and their calculation.

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