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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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