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Exercise $13-20($Algo$)$ Various transactions involving contingencies; disclosures $[$LO$13-5,13-6]$

The following selected transactions relate to contingencies of Classical Tool Makers, Incorporated, which began operations in July

Classical's fiscal year ends on December $31.$ Financial statements are issued in April $2025.$

Classical's products carry a one$-$year warranty against manufacturer's defects. Based on previous experience, warranty costs are

expected to approximate $2\%$ of sales. Sales were $$3\mathrm{.}9$ million $($all credit$)$ for $2024.$ Actual warranty expenditures were $$32,700$

and were recorded as warranty expense when incurred.

Although no customer accounts have been shown to be uncollectible, Classical estimates that $2\%$ of credit sales will eventually

prove uncollectible.

In December $2024,$ the state of Tennessee filed suit against Classical, seeking penalties for violations of clean air laws. On

January $23,2025,$ Classical reached a settlement with state authorities to pay $$3\mathrm{.}4$ million in penalties.

Classical is the plaintiff in a $$5\mathrm{.}9$ million lawsuit filed against a supplier. The suit is in final appeal and attorneys advise that it is

virtually certain that Classical will win the case and be awarded $$4\mathrm{.}4$ million, an amount that is material to Classical.

In November $2024,$ Classical became aware of a design flaw in an industrial saw that poses a potential electrical hazard. A

product recall appears unavoidable. Such an action would likely cost the company $$690,000.$

Classical offered $$25$ cash rebates on a new model of jigsaw. Customers must mail in a proof$-$of$-$purchase seal from the package

plus the cash register receipt to receive the rebate. Experience suggests that $70\%$ of the rebates will be claimed. Eleven

thousand and nine hundred of the jigsaws were sold in $2024.$ Total rebates to customers in $2024$ were $$124,000$ and were

recorded as promotional expense when paid.

Required:

$1-$a$.$ Prepare the year$-$end entries for any amounts that should be recorded as a result of each of the above contingencies.

$1-$b$.$ Indicate whether a disclosure note is needed for the above transactions.

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