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Roundhouse Tools has several potential warranty claims as a result of damaged tool kits. Review each situation and (1) determine the treatment for each situation as probable and estimable, probable and inestimable, reasonably possible, or remote; (2) determine what, if any, recognition or note disclosure is required; and (3) prepare any journal entries required to recognize a contingent liability. A. Roundhouse Tools has several claims for replacement of another tool kit not listed as one of their damaged tool kits. The honored warranty for these tool kits is not likely but is not remote. It is possible. B. A pending warranty claim has been received with the projected cost to be $450. Roundhouse Tools believes honoring that warranty claim is likely to occur and that figure is reasonably estimated. C. Roundhouse Tools believes other potential warranties may have to be honored outside of the warranty period, but this is unlikely to occur. D. Warranty replacements will cost the company a percentage of sales for the period. This amount allotted for warranty replacements cannot be reasonably estimated but is likely to occur.

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Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685

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Chapter
Section
FindFindarrow_forward

Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
Chapter 12, Problem 6PB
Textbook Problem
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Roundhouse Tools has several potential warranty claims as a result of damaged tool kits. Review each situation and (1) determine the treatment for each situation as probable and estimable, probable and inestimable, reasonably possible, or remote; (2) determine what, if any, recognition or note disclosure is required; and (3) prepare any journal entries required to recognize a contingent liability.

A. Roundhouse Tools has several claims for replacement of another tool kit not listed as one of their damaged tool kits. The honored warranty for these tool kits is not likely but is not remote. It is possible.

B. A pending warranty claim has been received with the projected cost to be $450. Roundhouse Tools believes honoring that warranty claim is likely to occur and that figure is reasonably estimated.

C. Roundhouse Tools believes other potential warranties may have to be honored outside of the warranty period, but this is unlikely to occur.

D. Warranty replacements will cost the company a percentage of sales for the period. This amount allotted for warranty replacements cannot be reasonably estimated but is likely to occur.

To determine

(a)

Introduction:

A contingent liability is an outcome of an unknown or uncertain situation occurs and produces a future debt for the company.

To identify:

The contingent liability.

Explanation of Solution

Identification of contingent liability:

Situation Type of contingent liability
The claim for replacement of another tool kit is not listed as one of their damaged tool kit. The honored warranty is not likely but not remote. It is possible. Remotely possible
A pending warranty of $450 project cost is received...
To determine

(b)

To identify:

The reorganization in the financial statement or note is required

To determine

(c)

To journalize:

The transactions relating to the contingent liability.

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Chapter 12 Solutions

Principles of Accounting Volume 1
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