Dustin Clemens is the accounting and finance manager for a manufacturer. At year-end, he must determine how to account for the company’s contingencies.
His manager, Madeline Pretti, objects to Clemens’s proposal to recognize an expense and a liability for warranty service on units of a new product introduced in the fourth quarter. Pretti comments, “There’s no way we can estimate this warranty cost. We don’t owe anyone anything until a product fails and it is returned. Let’s report an expense if and when we do any warranty work.”
Required: Prepare a memorandum in Word for Clemens to send to Pretti defending his proposal,