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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.
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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