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1)An entity provided a 3 year warranty on one of its new products

Accounting

1)An entity provided a 3 year warranty on one of its new products. Management expects that the cost of servicing the warranty as a % of cost will be as follows: 2% of cost in the first year 3% of cost in the second year, and 4% of cost in the third year. Total sales of the product in the first two years were $1,800,000 and $2,500,000 respectively. Warranty costs incurred in the first two years were $20,500 and $64,000 respectively. Assume a gross margin of 40%, what is the balance in the warranty liability account at the end of the second year?

2)

A former employee is suing the entity for wrongful dismissal in the amount of $500,000.

Legal counsel believes that the following probability distribution applies in this situation:

Payout Probability

$0 35%

$100,000 30%

$250,000 30%

$500,000 5%

Assess whether or a provision needs to be recorded. If you believe that a provision needs

to be recorded, calculate the amount of the provision.

 

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