Answer and Explanation:
1. Yes, this situation represents a loss contingency.
The occurrence of warranty liability is probable and the amount can be reasonably estimated so it represents a contingent liability.
2.
a. Accounts receivable Dr, $5,780,000
To Sales $5,780,000
(Being the sales is recorded)
b. Warranty expense Dr, $173,400 (5,780,000 × 3%)
To Estimated warranty liability $173,400
(Being the warranty expense is recorded)
c. Estimated warranty liability Dr, $38,500
To Cash, wages payable, parts and supplies, etc. $38,500
(Being cash paid is recorded)
3 .Liability = $173,400 - $38,500
= $134,900
