Handles problem with transitions

See the clip on the bottom (second clip in the timeline) starts at the physical first frame of the original media. There is nothing to create a transition with. When you answer Yes to the prompt if you want to continue or not with a transition, FCP automatically shifts that clip one second to the left, so there is enough media to use for the one second cross fade.

The second clip that was put into the timeline, was the bringing of that clip trimmed before you edited it into the timeline? Double check the edit point to open the precision editor. Take a screenshot of what you see and post it here.

Please do as Tom asked, and post a screenshot showing the "precision editor": double-click on the edit point to show something like the image below. Note that, for a transition of, say, 1 second, each clip must have at least half a second available as handle (in general, you need half the duration of the transition as a handle for each clip).

You don’t need to do anything. As Ben said the application will do it for you. Add the transition, get the warning, and let the dialog create the necessary overlap.

What Tom and Luis said is that we need a margin to overlap the clips.