Question
Edge Co., a toy manufacturer, is in the process of preparing its financial statements for the...
| Edge Co., a toy manufacturer, is in the process of preparing its financial statements for the year ended December 31, 2013. Edge expects to issue its 2013 financial statements on March 1, 2014. |
| Given in question are various information that has not been reflected in the financial statements. For each item: |
| 1) Determine if an adjustment is required and select the appropriate amount, if any, from the options provided: |
| a) No adjustment Required b) $150,000 c) $100,000 |
| 2) Enter either Yes or No if additional disclosure is required, either on the face of the financial statements or in the notes to the financial statements. |
Question 3 - "Edge offers an unconditional warranty on its toys. Based on past experience, Edge estimates its warranty expense to be 1% of sales. Sales during 2013 were $10,000,000."
"$100,000; Yes"
"$150,000; Yes"
No adjustment is required; No
No adjustment is required; Yes
Answers
Question 3
The correct answer is "$100,000; Yes".
Supporting Explanations:
1)
Yes, adjustment of $100,000 ($10,000,000*1/100) is required to be made for Warranty Expenses as Edge offers an unconditional warranty on its toys and estimated the warranty liability based on the past experience. Therefore, the adjustment of $100,000 is required to be made.
2)
Yes, Edge is required to make an additional disclosure for Warranty Expenses on the face of the financial statements because Edge offers an unconditional warranty on its toys and estimated the warranty liability based on the past experience.
Hence, the answer to make a disclosure is "Yes".
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