This is a discussion on estimated current liabiltiies.
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There are two types of current liabilities that must be estimated. Describe them and explain why they must be estimated. How are the financial statements affected if they are not estimated?
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Estimated Warranty Payable and Contingent Liabilities are two types of current liabilities that must be estimated. Estimated Warranty Payable - matches the warranty expense in the same period as revenue is recorded for the warranty (Horngren, Harrison, & Oliver, 2012). For instance, Myrick's Tires may not know the exact amount of its warranty expense and assumes that 2% of its sales will need repairs or replacement. As of May 4, 2012, $30,000 of its sales is subjected to warranty. Myrick's Tires estimates a warranty expense of $600.00 and records this amount in the same period as the revenue earned for the warranty. Contingent liabilities are potential liabilities that depend upon future events before becoming actual liabilities. Suppose a customer threatens to sue Myrick's Tires for faulty equipment and depending whether or not the customer has a valid case; Myrick's Tires may be required to pay the customer damages. However, Myrick's Tires will not record an expense or actual liability based upon an estimated amount until it is more likely that the lawsuit will ensue.
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The solution discusses types of current liabilities that must be estimated.
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Estimated warranty payable does not match the warranty expense in the same period. The estimated warranty payable is the estimated amount reported on the balance sheet under the method as described, as a percent of sales. The warranty expense is the amount that has been incurred as an expense due to customers exercising their warranties, and is reported separately on the income statement as a ...
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