P13-13 (Liability
Errors)
P13-13 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..
TUTORIAL PREVIEW
Recognition of Warranty
Expense
The client started to manufacture during June of
this year a new line of dishwashers and sold 120,000 dishwashers for
$60,000,000.
File name:
P13-13 Liability Errors.docx File type: .docx PRICE: $7
