Chapter 13

On March 31, 2005, Dallas Co. received an advance payment of 60% of the sales price for special order goods to be manufactured and delivered within five months. At the same time, Dallas subcontracted for production of the special order goods at a price equal to 40% of the main contract price. What liabilities should be reported in Dallas' March 31, 2005 balance sheet?

The only liability (deferred revenue) to be recorded is the advance for 60% of the main contract price. Dallas received this cash and has a liability for that amount until it performs on the contract. Dallas has no liability for the subcontracted production because no resources have been exchanged.

Case Cereal Co. frequently distributes coupons to promote new products. On October 1, Case mailed 1 million coupons for $.45 off each box of cereal purchased. Case expects 120,000 of these coupons to be redeemed before the December 31 expiration date. It takes 30 days from the redemption date for Case to receive the coupons from the retailers. Case reimburses the retailers an additional $.05 for each coupon redeemed. As of December 31, Case had paid retailers $25,000 related to these coupons and had 50,000 coupons on hand that had not been processed for payment. What amount should Case report as a liability for coupons in its December 31 balance sheet?

$.45 off each box of cereal purchased Case reimburses the retailers an additional $.05 for each coupon redeemed Case expects 120,000 of these coupons to be redeemed before the December 31 expiration date $.45 + .$.05 x 120,000 = $60,000 As of December 31, Case had paid retailers $25,000 related to these coupons so there is $35,000 estimated liability left at year end. Answer is $35,000

Ames, Inc. has $500,000 of notes payable due June 15, 2003. Ames signed an agreement on December 1, 2002 to borrow up to $500,000 to refinance the notes payable on a long-term basis with no payments due until 2004. The financing agreement stipulated that borrowings may not exceed 80% of the value of the collateral Ames was providing. At the date of issuance of December 31, 2002 financial statements, the value of the collateral was $600,000 and is not expected to fall below this amount during 2003. In Ames' December 31, 2002 balance sheet, the obligation for these notes payable should be classified as Short term and Long term.

Ames has successfully refinanced a short-term note on a long-term basis before the issuance of the 2002 financial statements (FAS 6). The borrowings on a long-term basis are limited to $480,000 (.80 x $600,000 collateral provided by Ames). Thus, $480,000 of the note is reclassified as long term, and the remaining $20,000 of the note is classified as current.

What is the underlying concept that supports the immediate recognition of a contingent loss?

Conservatism