Warranties and Loss Contingencies the following two

independent
Warranties and Loss Contingencies the following two independent situations involve loss
contingencies.Part 1Benson Company sells two products, Grey and Yellow. Each carries a one-
year warranty.1. Product Grey—Product warranty costs, based on past experience, will normally
be 1% of sales.2. Product Yellow—Product warranty costs cannot be reasonably estimated
because this is a new product line. However, the chief engineer believes that product warranty
costs are likely to be incurred. How should Benson report the estimated product warranty costs
for each of the two types of merchandise above? Discuss the rationale for your answer. Do not
discuss disclosures that should be made in Benson’s financial statements or notes.Part
2Constantine Company is being sued for $4,000,000 for an injury caused to a child as a result
of alleged negligence while the child was visiting the Constantine Company plant in March
2010. The suit was filed in July 2010. Constantine’s lawyer states that it is probable that
Constantine will lose the suit and be found liable for a judgment costing anywhere from
$400,000 to $2,000,000. However, the lawyer states that the most probable judgment is
$1,000,000.How should Constantine report the suit in its 2010 financial statements? Discuss the
rationale for your answer. Include in your answer disclosures, if any that should be made in
Constantine’s financial statements or notes.(AICPA adapted)View Solution:
Warranties and Loss Contingencies the following two independent
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