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Distinction between a direct-financing lease and a sales-type lease
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ACC 537 Week 4 Textbook P13 13 (Liability Errors) Millay
Corporations (Memo and Solution)
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13-13 (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.