Maurice Tutor

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    Argosy University/ Phoniex University/
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    Phoniex University
    Oct-2001 - Nov-2016

Category > Accounting Posted 21 Aug 2017 My Price 11.00

Reese Company

Reese Company sells two  types of merchandise, Type A and Type B. Each carries a one-year warranty.

Type A merchandise: Product warranty costs, based on past experience, will normally be 1% of sales.

Type B merchandise: Product warranty costs cannot be rea- sonably estimated because this is a new product line. However, the chief engineer believes that product warranty costs are likely to be incurred.

Reese Company is also being sued for $2,000,000 for an injury caused to a child as a result of alleged negligence while the child was visiting the Reese Company plant in March 2007. The suit was filed in July 2007. Reese’s lawyer states that it is probable that Reese will lose the suit and be found  liable  for  a  judgment  costing  anywhere      from

$200,000 to $900,000. However, the lawyer states that the most probable judgment is $400,000.

Required

1.      How should Reese report the estimated product war- ranty costs for each of the two types of merchandise mentioned earlier? Explain the rationale for your answer. Do not discuss deferred income tax implications, or dis- closures that should be made in Reese’s 2007 financial statements or notes.

2.      How should Reese report the suit in its 2007 financial statements? Explain the rationale for your answer. Include in your answer disclosures, if any, that should be made in Reese’s financial statements or notes.

Answers

Maurice Tutor
(5)
Status NEW Posted 21 Aug 2017 03:08 PM My Price 11.00

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