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P13-13 (Liability Errors) You are the independent auditor engaged to
audit Millay Corporation's December 31, 2014, financial statements.
Millay manufactures household appliances. During the course of your
audit, you discovered the following contingent liabilities.
1. Millay began production of a new dishwasher in June 2014 and,
by December 31, 2014, sold 120,000 to various retailers for $500
each. Each dishwasher is under a one-year warranty. The company
estimates that its warranty expense per dishwasher will amount to
$25. At year-end, the company had already paid out $1,000,000 in
warranty expenses. Millay's income statement shows warranty
expenses of $1,000,000 for 2014. Millay accounts for warranty costs
on the accrual basis. As presented, these contingencies are not
reported in accordance with GAAP, which may create problems in
issuing a favorable audit report. You feel the need to note these
problems in the work papers.
Instructions Heading each page with the name of the company,
balance sheet date, and a brief description of the problem, write a
brief narrative for above issues in the form of a memorandum to be
incorporated in the audit work papers. Explain what led to the
discovery of each problem, what the problem really is, and what you
advised your client to do (along with any appropriate journal entries)
in order to bring these contingencies in accordance with GAAP.
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ACC 537 Week 4 Textbook Problem P15-4, E21-2
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