Rotary Tools Sells Power Tools and Backs Each Product It

question 10

Essay

Rotary Tools sells power tools and backs each product it sells with a one-year warranty against defects. Based on previous experience, the company expects warranty costs to be approximately 5% of sales. By the end of the first year, sales and actual warranty expenditures are $800,000 and $13,000, respectively.
1. Does this situation represent a contingent liability? Why or why not?
2. Record warranty expense and warranty liability for the year based on 5% of sales.
3. Record the reduction in warranty liability and the reduction in cash of $13,000 incurred during the year.
4. What is the balance in the Warranty Liability account after the entries in parts 2 and 3?

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Definitions:

Financial Performance

The measure of a firm's profitability, liquidity, and solvency, reflecting its overall health and efficiency at generating profits.

Incentive Plans

Programs designed to motivate and compensate employees beyond their regular pay, based on performance or achievement of specific targets.

Senior Executives

High-level managers and officers within a company who are responsible for making crucial decisions and implementing strategies that shape the company's direction and success.

Conflict of Interest

A situation where an individual's personal interests could interfere with their professional duties or responsibilities, potentially leading to biased decisions.