The Following Selected Transactions Relate to Contingencies of Eastern Products

question 122

Essay

The following selected transactions relate to contingencies of Eastern Products Inc., which began operations in July 2018. Eastern's fiscal year ends on December 31. Financial statements are published in April 2019.
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 2018.
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 2018 and were recorded as warranty expense when incurred.
3. In December 2018, 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 2018, 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, 2019.
5. Eastern is the plaintiff in a $40 million lawsuit filed against a customer for costs and lost profits from contracts rejected in 2018. 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.

Recognize the difference between self-disclosure and self-description.

Comprehend the elements and benefits of trust in relationships.

Identify the components of the Johari Window and their importance in communication and self-awareness.

Master the guidelines for effective self-disclosure to enhance interpersonal relationships.

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Definitions:

Discount Rate

This rate is essential in discounted cash flow analysis for calculating the present value of future cash flows.

Present Value

The immediate financial worth of an expected future sum of money or cash flows, discounted with a predetermined rate of return.

Insurance Settlement

The payment made by an insurance company to a policyholder or claimant as compensation for a covered loss.

Discount Rate

in finance, refers to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows.