Answer:
1. Does this situation represent a loss contingency?
since warranty liabilities are both probable and can be measured, yes, they are considered loss contingencies
2. Prepare journal entries that summarize sales of the awnings (assume all credit sales) and any aspects of the warranty that should be recorded during 2021.
to record sales revenue
Dr Accounts receivable 5,800,000
Cr Sales revenue 5,800,000
to record warranty liability
Dr Warranty expense 174,000
Cr Warranty liability 174,000
warranty liability = $5,800,000 x 3%
to record actual warranty expenditures
Dr Warranty liability 51,000
Cr Cash/inventory/wages payable 51,000
3. What amount should Cupola report as a liability at December 31, 2021?
Warranty liability account's balance on December 31, 2021 = $174,000 - $51,000 = $123,000
