Financial Accounting II - Chapter 13 - Exam 3 Review
Can short-term obligations that are expected to be refinanced on a long-term basis be reported as noncurrent?
These obligations can be reported as noncurrent liabilities only if two conditions are met: 1. The corporation must intend to refinance on a long-term basis 2. has demonstrated the ability to refinance on a long-term basis
Jane's Donut Co. borrowed $203,000 on January 1, 2021, and signed a two-year note bearing interest at 10%. Interest is payable in full at maturity on January 1, 2023. In connection with this note, Jane's should report interest expense at December 31, 2021, in the amount of?
$203,000 × 10% × 12/12 = $20,300
At the beginning of 2021, Angel Corporation began offering a two-year warranty on its products. The warranty program was expected to cost Angel 3% of net sales. Net sales made under warranty in 2021 were $213 million. Fifteen percent of the units sold were returned in 2021 and repaired or replaced at a cost of $4.80 million. The amount of warranty expense on Angel's 2021 income statement is?
$213 mil * 3% = $6.39 Sales * % of expected cost = warranty liability
E 13-2: On July 1, 2021, Ross-Livermore Industries issued nine-month notes in the amount of $400 mil Interest is payable at maturity. Determine the amount of interest expense that should be recorded in a year-end adjusting entry under the assumptions: 10% interest, Sept. 30.
$400 million × 10% × 3/12 = $10 million
E 13-2: On July 1, 2021, Ross-Livermore Industries issued nine-month notes in the amount of $400 mil Interest is payable at maturity. Determine the amount of interest expense that should be recorded in a year-end adjusting entry under the assumptions: 12% interest, Dec. 31.
$400 million × 12% × 6/12 = $24 million
E 13-2: On July 1, 2021, Ross-Livermore Industries issued nine-month notes in the amount of $400 mil Interest is payable at maturity. Determine the amount of interest expense that should be recorded in a year-end adjusting entry under the assumptions: 9% interest, Oct. 31.
$400 million × 9% × 4/12 = $12 million
Reunion BBQ has $4,000,000 of notes payable due on March 11, 2017, which Reunion intends to refinance. On January 5, 2017, Reunion signed a line of credit agreement to borrow up to $3,500,000 cash on a two-year renewable basis. On the December 31, 2016, balance sheet, Reunion should classify the NP as what?
$500,000 of notes payable as short-term and $3,500,000 as long-term obligations. $4,000,000 notes payable − $3,500,000 demonstrated ability to refinance = $500,000 current liability.
What is the accounting treatment for Probable loss contengencies?
-Probable, Known: Liability accrued and disclosure note. -Probable, reasonably estimable: Liability accrued and disclosure note. -Probable, not reasonably estimable: Disclosure note only.
What is the accounting treatment for Reasonably possible loss contingencies?
-Reasonably possible, known: disclosure note only. -Reasonably possible, reasonable estimable: Disclosure note. -Reasonably possible, not reasonably estimable: Disclosure note only.
What is the accounting treatment for remote loss contingencies?
-Remote, known: No disclosure required. -Remote, reasonably estimable: no disclosure required -remote, not reasonably estimable: no disclosure required.
Provide examples of current liabilities
-accounts payable -trade notes payable -short term notes payable -used line of credit -secured short term loan -commercial paper -accrued liabilities -liabilities from advance collections from customers -current maturities of long-term debt
Sound Audio manufactures and sells audio equipment for automobiles. Engineers notified management in December 2021 of a circuit flaw in an amplifier that poses a potential fire hazard. An intense investigation indicated that a product recall is virtually certain, estimated to cost the company $2 million. The fiscal year ends on December 31. 1. Should this loss contingency be accrued & disclosed, only disclosed, or neither? 2. What loss, if any, should Sound Audio report in its 2021 income statement? 3. What liability, if any, should Sound Audio report in its 2021 balance sheet? 4. Prepare any journal entry needed.
1-3: 1. Loss contingency Accrued & disclosed 2. Loss: $2 mil 3.Liability $2 mil This is a loss contingency. A liability is accrued if it is both probable that the confirming event will occur and the amount can be at least reasonably estimated. If one or both of these criteria is not met, but there is at least a reasonable possibility that the loss will occur, a disclosure note should describe the contingency. In this case, a liability is accrued since both of these criteria are met. 4. D Loss-Product Recall 2 mil C Lia-Product Recall 2 mil
Woodmier Lawn Products introduced a new line of commercial sprinklers in 2020 that carry one-year warranty against manufacturer's. defects. Because this was the first product for which the company offered a warranty, trade publications were consulted to determine the experience of others in the industry. Based on that experience, warranty costs were expected to approximate 2% of sales. Sales of the sprinklers in 2020 were $2.5 mil. Accordingly, the following entries relating to the contingency for warranty costs were recorded during the first year of selling the product: Accrued Lia and Exp: D Warranty Exp (2%*2.5mil) 50,000 C Warranty Lia 50,000 D Actual Expenditures (summary entry) C Warranty Lia. 23,000 Cash 23,000 In late 2021, the company's claims experience was evaluated and it was determined that claims were far more than expected-3% of sales rather than 2%. 1. Assuming sales of the sprinklers in 2021 were $3.6 mil and warranty expenditures in 2021 totaled $88,000, prepare any journal entries related to the warranty. 2. Assuming sales of the sprinklers were discontinued after 2020, prepare any journal entry(s) in 2021 related to the warranty.
1. D Acc Lia and Exp. Warranty exp. (3%*3,600,000) 108,000 C Warranty Liability 108,000 Act. Exp. (summary entry) D Warranty Lia 88.000 C Cash 88,000 2. Actual Expenditures D Warranty Lia (50,000-23,000) $27,000 D Loss on Product Warranty [(3%-2%]*2,500,000] 25,000 C Cash $52,000* (3%*2,500,000)-23,000=52,000
Bavarian Bar and Grill opened for business in November 2021. During its first two months of operation, the restaurant sold gift cards in various amounts totaling $5,200, mostly as Christmas presents. They are redeemable for meals within two years of the purchase date, although experience within the industry indicates that 80% of gift cards are redeemed within one year. Gift cards totaling $1,300 were presented for redemption during 2021 for meals having a total price of $2,100. The sales tax rate on restaurant sales is 4%, assessed at the time meals (not gift cards) are purchased. Sales taxes will be remitted in January. 1. Prepare the appropriate journal entries (in summary form) for the gift cards and meals sold during 2021 (keeping in mind that, in actuality, each sale of a gift card or a meal would be recorded individually). 2. Determine the liability for gift cards to be reported on the December 31, 2021, balance sheet. 3. What is the appropriate classification (current or noncurrent) of the liabilities at December 31, 2021?
1. Purchase of gift cards: D Cash 5,200 C Deferred Gift Card Rev 5,200 Meals purchased: D Cash 884 D Deferred GC rev 1,300 C Sales Rev 2,100 C Sales Tax Payable 84 Cash ($2,100 + $84 - $1,300) = $884Sales taxes payable (4% × $2,100) = $84 2. Gift cards sold $5,200 Gift cards redeemed (1,300) Deferred gift card revenue liability as of December 31 $3,900 3. Sales Tax Lia-Current: 84 Sales tax-noncurrent: 0 Liability Giftcards and meals - current: 2,860 Liability GC and meals - noncurrent: 1,040 The sales tax liability is a current liability because it is payable in January. The liability for gift cards is part current and part noncurrent: Gift cards sold $5,200 × 80% Current liability $4,160 - Gift cards redeemed (1,300) = Current liability at December 31 $2,860 Noncurrent liability at December 31 ($5,200 × 20%) 1,040 Total liability for gift cards $3,900
BE 13-9: Consider the following liabilities of Future Brands, Inc., at Dec. 31, 2021, the company's fiscal year-end. Should they be reported as current or long-term liabilities? a. $77 mil of 8% notes are due on May 31, 2025. The notes are callable by the company's bank, beginning March 1, 2022. b. $102 mil of 8% notes are due on May 31, 2026. A debt covenant requires Future to maintain a current ratio (ratio of current assets to current liabilities) of at least 2 to 1. Future is in violation of this requirement but has obtained a waiver from the bank until May 2022, since both companies feel Future will correct the situation during the first half of 2022.
1. Current liability—The requirement to classify currently maturing debt as a current liability includes debt that is callable, or due on demand, by the creditor in the upcoming year even if the debt is not expected to be called. 2 Long-term liability—The current liability classification includes (a) situations in which the creditor has the right to demand payment because an existing violation of a provision of the debt agreement makes it callable and (b) situations in which debt is not yet callable, but will be callable within the year if an existing violation is not corrected within a specified grace period—unless it's probable the violation will be corrected within the grace period. In this case, the existing violation is expected to be corrected within six months.
At December 31, 2021, Newman Engineering's liabilities include the following: 1. $10 million of 9% bonds were issued for $10 million on May 31, 1999. The bonds mature on May 31, 2029, but bondholders have the option of calling (demanding payment on) the bonds on May 31, 2022. However, the option to call is not expected to be exercised, given prevailing market conditions. 2. $14 million of 8% notes are due on May 31, 2022. A debt covenant requires Newman to maintain current assets at least equal to 175% of its current liabilities. On December 31, 2021, Newman is in violation of this covenant. Newman obtained a waiver from National City Bank until June 2022, having convinced the bank that the company's normal 2 to 1 ratio of current assets to current liabilities will be reestablished during the first half of 2022. 3. $7 million of 11% bonds were issued for $7 million on August 1, 1989. The bonds mature on July 31, 2022. Sufficient cash is expected to be available to retire the bonds at maturity. What portion of each liability is reported as a current liability and as a noncurrent liability?
1. Current: $10 mil NonCurrent: 0 The requirement to classify currently maturing debt as a current liability includes debt that is callable by the creditor in the upcoming year—even if the debt is not expected to be called. 2. Current: 14 mil Noncurrent: 0 The debt is due within one year, so should be classified as a current liability. If the debt was not due within one year, we would have to be concerned about the violation of the debt covenant. The current liability classification includes (a) situations in which the creditor has the right to demand payment because an existing violation of a provision of the debt agreement makes it callable and (b) situations in which debt is not yet callable, but will be callable within the year if an existing violation is not corrected within a specified grace period—unless it's probable the violation will be corrected within the grace period. In this case, the existing violation is expected to be corrected within six months, so if the debt were due far enough in the future to be normally classified as a noncurrent liability, it would still merit that noncurrent classification. 3. Current: 7 mil Noncurrent: 0 The debt should be reported as a current liability because it is payable in the upcoming year and will not be refinanced with long-term obligations.
E 13-8: The following selected transactions relate to liabilities of Interstate Farm Equipment Company for Dec. 2021. Interstate's fiscal year ends on Dec. 31. Prepare the appropriate journal entries for each transaction: 1. Dec. 15, received $7,500 from Bradley Farms toward the sale by Interstate of a $98,000 tractor to be delivered to Bradley on Jan. 6, 2022. 2. During Dec, received $25,500 of refundable deposits relating to containers used to transport equipment parts. 3. During Dec., credit sales totaled $800,000. The state sales tax rate is 5% and the local sales tax rate is 2%. (This is a summary journal entry for the many individual sales transactions for the period.)
1. D Cash 7,500 C Deferred rev. 7,500 2. D Cash 25,500 C Liability-Refundable Deposits 25,500 3. D AR 856,000 C Sales Rev. 800,000 Sales tax payable ([5%+2%]*800,000) 56,000
E 13-5: On January 1, 2021, Poplar Fabricators Corp. agreed to grant its employees two weeks of vacation each year, with the stipulation that vacation earned each year can be taken the following year. For the year ended Dec. 31, 2021, Poplar Fabricators' employees earned an average $900 per week. Seven hundred vacation weeks earned in 2021 were not taken during 2021. 1. Prepare the appropriate adjusting entry for vacations earned but not taken in 2021. 2. Suppose that, by the time vacations actually are taken in 2022, salary rates for employees have risen by an average of 5% from their 2021 level. Also, assume salaries earned in 2022 (including vacations earned and taken in 2022) were $31 mil. Prepare a journal entry that summarizes 2022 salaries and the payment for 2021 vacations taken in 2022.
1. D Salaries expense (700 × $900) 630,000 C Liability—compensated future absences 630,000 2. D Liability—compensated future absences 630,000 D Salaries expense ($31 million + [5% × $630,000]) 31,031,500 C Cash (total) 31,661,500
Outline the differences between US GAAP and IFRS with respect to current liabilities
1. Refinancing of short-term debt: U.S. GAAP: Liabilities payable within the coming year are classified as long-term liabilities if refinancing is completed before the date of issuance of the financial statements. IFRS: To be classified as long-term, liabilities must be refinanced before the balance sheet date. 2. Estimate of loss contingency: U.S. GAAP: Uses the low end of the range to estimate the expenditure required to settle present obligation IFRS: Uses the midpoint of the range to estimate the expenditure required to settle present obligation 3. Onerous contracts: U.S. GAAP: No disclosure or loss recognition is made for "onerous contracts", which are basically loss-making contracts. IFRS: Recognizes liabilities for "onerous contracts" 4. Gain contingencies: US GAAP: Gain contingencies are never accrued IFRS: Gain contingencies are accrued if future realization is "virtually certain" to occur
What are the four requirements for recognition of an accrual for paid future absences?
1. The obligation is attributable to employee services already performed 2. The paid absence can be taken in a later year. 3. Payment is probable. 4. The amount can be reasonably estimated. When the above conditions are met the compensated future absences are accrued in the year the compensation is earned.
Cupola Awning Corporation introduced a new line of commercial awnings in 2021 that carry a two-year warranty against manufacturer's defects. Based on their experience with previous product introductions, warranty costs are expected to approximate 3% of sales. Sales and actual warranty expenditures for the first year of selling the product were: Sales: 5 mil Actual Warranty Expenditures: $37,500 1. Does this situation represent a loss contingency? 2. Prepare journal entries that summarize sales of the awnings (assume all credit sales) and any aspects of the warranty that should be recorded during 2021. 3. What amount should Cupola report as a liability at December 31, 2021?
1. Yes. This is a loss contingency. There may be a future sacrifice of economic benefits (cost of satisfying the warranty) due to an existing circumstance (the warranted awnings have been sold) that depends on an uncertain future event (customer claims). The liability is probable because product warranties inevitably entail costs. A reasonably accurate estimate of the total liability for a period is possible based on prior experience. So, the contingent liability for the warranty is accrued. The estimated warranty liability is credited and warranty expense is debited in 2021, the period in which the products under warranty are sold. 2. Sale of Product: D AR 5 mil C Sales Rev 5 mil Recording of Potential Warranty Lia: D Warranty Exp 150,000 C Warranty Lia 150,000 Accrued liability and expense:Warranty expense (3% × $5,000,000) = $150,000 Actual Expenditures: D Warranty Lia 37,500 C Cash 37,500 3. Warranty Liability: 150,000 (Expense 3% of sales) - Actual expenditures: 37,500= 112,500 Balance
On January 1, 2016, Yukon Company agreed to grant its employees two weeks vacation each year, with the provision that vacations earned in a particular year could be taken the following year. For the year ended December 31, 2016, all twelve of Yukon's employees earned $1,200 per week each. Eight of these vacation weeks were not taken during 2016. In Yukon's 2016 income statement, how much expense should be reported for compensated absences?
2 weeks × 12 employees × $1200/week = $28,800.
E 13-2: On July 1, 2021, Ross-Livermore Industries issued nine-month notes in the amount of $400 mil Interest is payable at maturity. Determine the amount of interest expense that should be recorded in a year-end adjusting entry under the assumptions: 6% interest, Jan. 31.
400 million × 6% × 7/12 = $14 million
At April 1, 2022, the Food and Drug Administration is in the process of investigating allegations of false marketing claims by Hulkly Muscle Supplements. The FDA has not yet proposed a penalty assessment. Hulkly's fiscal year ends on Dec. 31, 2021. The company's financial statements are issued in April 2022. For the following scenario, determine the appropriate way to report the situation. Management feels an assessment is probable, and if an assessment is made, an unfavorable settlement of $13 mil is reasonably possible.
A disclosure note is required because an FDA claim is as yet unasserted, but an assessment is probable. Since an unfavorable outcome is not thought to be probable in the event of an assessment, no accrual is needed, but since an unfavorable outcome is thought to be reasonably possible in the event of an assessment, disclosure in a footnote is required. Keep in mind, though, that in practice, disclosure of an unasserted claim is rare. Such disclosure would alert the other party, the FDA in this case, of a potential point of contention that may otherwise not surface. The outcome of litigation and any resulting loss are highly uncertain, making difficult the determination of their possibility of occurrence.
Define 'gain contingency'
A gain contingency is an uncertain situation that may result in a gain. Gain contingencies are never accrued.
What is a line of credit?
A line of credit is an agreement with a bank to provide short-term financing, with amounts withdrawn by the borrower when needed. A noncommitted line of credit is an informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and paperwork. A committed line of credit is a more formal agreement that usually requires the company to pay a commitment fee to the bank to keep a specified amount available to the company.
Define 'loss contingency' and outline the required accounting treatment
A loss contingency is an existing, uncertain situation involving potential loss depending on whether some future event occurs. Whether a contingency is accrued and reported as a liability depends on: 1. the likelihood that the confirming event will occur and 2. what can be determined about the amount of loss.
When cash is received from customers in the form of a refundable deposit, the cash account is increased with a corresponding increase in?
A. A Current lia - refundable deposits
Which of the following descriptions about commercial paper are true? (Select all that apply.) A. Allows a company to borrow cash without having to follow formal loan procedures and paperwork. B. Interest is often discounted at issuance. C. Interest rate is often higher than in a bank loan. D. Sold in denominations of $50,000
A. Allows a company to borrow cash without having to follow formal loan procedures and paperwork. B. Interest is often discounted at issuance.
Which of the following statements about liabilities is true? A. In part, liabilities are probable, future sacrifices of economic benefits that result from past transactions or events. b. Current liabilities as obligations payable within one year from the balance sheet date or within the firm's operating cycle, whichever is shorter. c. Liabilities ordinarily are recorded at their maturity amounts. d. In practice, liabilities payable after one year from the balance sheet date ordinarily are recorded at their maturity amounts.
A. In part, liabilities are probable, future sacrifices of economic benefits that result from past transactions or events.
Which of the following is not a liability? a. An unused line of credit. b. Estimated income taxes. c. Sales tax collected from customers. d. Advances from customers.
A. an unused line of credit
What is the difference between accounts payable and trade notes payable?
Accounts payable are obligations to suppliers of merchandise or of services purchased on open account. Trade notes payable are formally recognized by a written promissory note. These are of a longer term and bear interest.
Record the journal entries. Employees have earned a total of 9,000 weeks of vacation time that can be carried forward. The average weekly wage $600.
Accrual is 9,000 hours * $600 = $5,400,000 Adjusting Entry on Dec. 31: D Salaries expense: $5,400,000 C Liability-Compensated future absences: $5,400,000
At April 1, 2022, the Food and Drug Administration is in the process of investigating allegations of false marketing claims by Hulkly Muscle Supplements. The FDA has not yet proposed a penalty assessment. Hulkly's fiscal year ends on Dec. 31, 2021. The company's financial statements are issued in April 2022. For the following scenario, determine the appropriate way to report the situation. Management feels an assessment is probable, and if an assessment is made, an unfavorable settlement of $13 mil is probable.
Accrual of the loss is required because an FDA claim is as yet unasserted, but an assessment is probable. Since an unfavorable outcome also is thought to be probable in the event of an assessment, accrual is needed. Keep in mind, though, that in practice, accrual of an unasserted claim is rare. Such disclosure could alert the other party, the FDA in this case, of a potential point of contention that may otherwise not surface. Accrual could be offered in court as an admission of responsibility. A loss usually is not recorded until after the ultimate settlement has been reached or negotiations for settlement are substantially completed.
After the end of the 2021 fiscal year but before financial statements were issued, EPK Company learned that an arbitrator had made a $10 million judgment in a litigation judgment against it. The claim had been made in 2020 for alleged defects of products sold in 2019. Prior to learning of the judgment, EPK had not accrued any litigation loss, and does not plan to appeal. For the 2021 fiscal year, EPK should?
Accrue a $10 million liability and explain it in a note to the financial statements.
Barry Company has a calendar year-end. On December 15, Year 1, a customer was injured using a product manufactured by Barry. That customer files a lawsuit against Barry on January 15, Year 2. On February 15, Year 2, Barry's attorney advises Barry to settle the claim for $100,000 because a loss in that amount is probable and material. Barry has not yet distributed its Year 1 financial statements. What must Barry do with regards to those financial statements?
Accrue the loss as of December 31, and disclose the lawsuit in the notes to the financial statements. Even though the lawsuit was not filed until after year-end, the event giving rise to it happened during the year. In this case, since the loss is probable, it should be accrued and disclosed.
Define accrued liabilities and provide examples.
Accrued liabilities represent expenses already incurred but not yet paid. These liabilities are recorded by way of adjusting entries at the end of the reporting period. Examples: -accrued interest payable -accrued salaries, commissions and bonuses -accruals for compensated future absences (vacation and sick leave)
Peterson Photoshop sold $2,300 in gift cards on a special promotion on October 15, 2021, and sold $3,450 in gift cards on another special promotion on November 15, 2021. Of the cards sold in October, $230 were redeemed in October, $575 in November, and $690 in December. Of the gift cards sold in November, $345 were redeemed in November and $805 were redeemed in December. Peterson views the probability of redemption of a gift card as remote if the card has not been redeemed within two months. At 12/31/2021, Peterson would show a deferred revenue account for the gift cards with a balance of?
All of October sales recognized as revenue - since it is unlikely they will be redeemed since the two months has passed. November: November sales: $345+$805 = $1,150 Deferred Rev: GC Sold in Nov- redeemed cards = $3,450 - $1,150 = $2,300
What is an extended warranty and how should this be accounted for?
An extended warranty provides warranty protection beyond the manufacturer's original warranty. Because an extended warranty is priced and sold separately from the warranted product, this must be recognized as deferred revenue and recognized as revenue over the period of coverage.
Assume a cash sale of $10,000 during a company's first month of operations and the related sales tax collected from the customer in the amount of $1,000 has not yet been remitted to the state. How will this transaction affect the company's financial statements prepared on the last day of that month? (Select all that apply.) A. Deferred revenue of $1,000 will be reported as a liability on the balance sheet. B. Current liabilities in the amount of $1,000 will be reported on the balance sheet. C. Sales revenue of $9,000 will be reported on the income statement. D. Sales revenue of $10,000 will be reported on the income statement. E. Sales revenue of $11,000 will be reported on the income statement.
B. Current liabilities in the amount of $1,000 will be reported on the balance sheet. D. Sales revenue of $10,000 will be reported on the income statement.
BE 13-15: Bell International estimated that a $10 mil loss will occur if a foreign government expropriates some company property. Expropriation is considered reasonably possible. How should Bell report the loss contingency?
Bell should disclose the $10 million loss contingency in a note, but not accrue it. A liability should be accrued if it is both probable that the confirming event will occur and the amount can be at least reasonably estimated. If one or both of these criteria is not met (as in this case), but there is at least a reasonable possibility that the loss will occur, a disclosure note should describe the contingency.
How should advance collections from customers be accounted for?
Collecting cash from a customer as a refundable deposit or as an advance payment for products or services creates a liability to return the deposit or to supply the products or services. Examples of advance collections: 1. Deposits and Advances from customers-refundable deposits-Advances from customers. 2. Gift Cards. 3. Collections for third parties.
What is commercial paper?
Commercial paper are unsecured notes sold in minimum denominations of $25,000 with maturities ranging from 1 to 270 days. Large, highly rated, corporations often obtain temporary financing by issuing commercial paper, which is purchased by other corporations as a short-term investment. Interest is discounted at the issuance of the note and the effective rate is normally lower than a bank loan.
Indicate how Accounts Payable should be reported in a balance sheet at Dec. 31, 2021.
Current Liability
Indicate how Commercial paper should be reported in a balance sheet at Dec. 31, 2021.
Current Liability
Indicate how Estimated quality assurance warranty cost should be reported in a balance sheet at Dec. 31, 2021.
Current Liability
Indicate how Long-term bonds that will be callable by the creditor in the upcoming year unless an existing violation is not corrected (there is a reasonable possibility the violation will be corrected within the grace period) should be reported in a balance sheet at Dec. 31, 2021.
Current Liability
Indicate how a note due March 3, 2022 should be reported in a balance sheet at Dec. 31, 2021.
Current Liability
Indicate how interest accrued on note, dec. 31, 2021 should be reported in a balance sheet at Dec. 31, 2021.
Current liability
Indicate how Customer advances should be reported in a balance sheet at Dec. 31, 2021.
Current liability.
E13-20: The following selected transactions relate to contingencies of Classical Tool Makers, Inc., which began operations in July 2021. Classical's fiscal year ends on Dec. 31. Financial Statements are issued in April 2022. Prepare the year-end entries for any amounts that should be recorded as a result of each of these contingencies and indicate whether a disclosure note is indicated. although no customer accounts have been shown to be uncollectible, classical estimates that 2% of credit sales will eventually prove uncollectible. ($2 mil in credit sales).
D Bad debt expense (2% × $2,000,000) 40,000 C Allowance for uncollectible accounts 40,000 Disclosure note indicated: Yes
E 13-20: The following selected transactions relate to contingencies of Classical Tool Makers, Inc., which began operations in July 2021. Classical's fiscal year ends on Dec. 31. Financial Statements are issued in April 2022. Prepare the year-end entries for any amounts that should be recorded as a result of each of these contingencies and indicate whether a disclosure note is indicated. In Nov. 2021, Classical became aware of a design flaw in an industrial saw that poses a potential electrical hazard. A product recall appears unavoidable. Such an action would likely cost the company $500,000.
D Loss—product recall 500,000 C Liability—product recall 500,000 Disclosure note indicated: Yes
E 13-20: The following selected transactions relate to contingencies of Classical Tool Makers, Inc., which began operations in July 2021. Classical's fiscal year ends on Dec. 31. Financial Statements are issued in April 2022. Prepare the year-end entries for any amounts that should be recorded as a result of each of these contingencies and indicate whether a disclosure note is indicated. Classical offered $25 cash rebates on a new model of jigsaw. Customers must mail in a proof-of-purchase seal from the package plus the cash register receipt to receive the rebate. Experience suggests that 60% of the rebates will be claimed. 10,000 of the jigsaws were sold in 2021. Total rebates to customers in 2021 were $105,000 and were recorded as promotional expense when paid.
D Promotional expense ([60% × $25 × 10,000] - $105,000) 45,000 C Estimated premium liability 45,000 Disclosure note indicated: YesFeedback: Because the rebate is offered as a promotion rather than provided as part of a sales transaction, it really is a "coupon" as discussed in the Additional Consideration Box in the text section for product warranties and guarantees. An expense and liability is recorded for the estimated amount that will be paid in the future. If the rebate instead was offered as part of a sale transaction, it would be accounted for as variable consideration as discussed in Chapter 6. In that case, rather than debiting an expense, revenue associated with the sale would be reduced, and a liability recorded for the estimated amount that will be paid in the future.
E 13-20: The following selected transactions relate to contingencies of Classical Tool Makers, Inc., which began operations in July 2021. Classical's fiscal year ends on Dec. 31. Financial Statements are issued in April 2022. Prepare the year-end entries for any amounts that should be recorded as a result of each of these contingencies and indicate whether a disclosure note is indicated. Classical's products carry a one-year warranty against manufacturer's defects. Based on previous experience, warranty costs are expected to approximate 4% of sales. Sales were $2 mil (all credit) for 2021. Actual warranty expenditures were $30,800 and were recorded as warranty expense when incurred.
D Warranty expense ([4% × $2,000,000] - $30,800) 49,200 C Estimated warranty liability 49,200 Disclosure note indicated: Yes
E 13-3: The following selected transactions related to liabilities of United Insulation Corporation. United's Fiscal year ends on Dec. 31. Prepare the appropriate journal entry. Dec. 1: Supported by the credit line, issued $10 mil of commercial paper on a nine-month note. Interest was discounted at issuance at a 9% discount rate. Dec 31. Recorded any necessary adjusting entries. Sept 1. Paid the commercial paper at maturity.
Dec 1: D Cash: $9,325,000 D Discount (10 mil*9%*9/12) 675,000 C NP (face amount) 10,000,000 Dec. 31: D Int. exp (10,000,000*9%*1/12) 75,000 C Discount on NP 75,000 Sept. 1: D. Int. exp (10 mil*9%*8/12) 600,000 C Discount on NP 600,000 D NP (balance) 10,000,000 C Cash (maturity amount) 10,000,000
BE 13-6: On December 12, 2021, Pace Electronics received $24,000 from a customer toward a cash sale of $240,000 of diodes to be completed on January 16, 2022. What journal entries should Pace record on December 12 and January 16?
December 12: D Cash 24,000 C Deferred revenue 24,000 January 16 D Cash 216,000 D Deferred revenue 24,000 C Sales revenue 240,000
Diversified Semiconductors sells perishable electronic components. Some must be shipped and stored in reusable protective containers. Customers pay a deposit for each container received. The deposit is equal to the container's cost. They receive a refund when the container is returned. During 2021, deposits collected on containers shipped were $850,000. Deposits are forfeited if containers are not returned within 18 months. Containers held by customers at January 1, 2021, represented deposits of $530,000. In 2021, $790,000 was refunded and deposits forfeited were $35,000. 1. Prepare the appropriate journal entries for received, returned, and forfeited during 2021. 2. Determine the liability for refundable deposits to be reported on the December 31, 2021, balance sheet.
Deposits Received: D Cash 850,000 C Lia-Refundable Deposits 850,000 Deposits Returned: D Liability-Refundable Deposits 790,000 C Cash 790,000 Deposits Forfeited: D Lia-Refundable Deposits 35,000 C rev-Sale of Containers 35,000 D COGS 35,000 C Inventory of Containers 35,000 2. Liability for Refundable Deposits Balance on January 1 $530,000 + Deposits received 850,000 - Deposits returned (790,000) - Deposits forfeited (35,000) = Balance on December 31 $555,000
Indicate how A determinable gain that is contingent on a future event that appears extremely likely to occur in three months should be reported in a balance sheet at Dec. 31, 2021.
Disclosure note only
Indicate how noncommitted line of credit should be reported in a balance sheet at Dec. 31, 2021.
Disclosure note only.
Patty's Bakery is a defendant in a lawsuit in which trademark infringement is claimed. Patty's attorney believes there is very little chance that the company will lose in court and no settlement offer has been made. If Patty's does lose, the damages could be as high as the $50,000 of damages claimed in the lawsuit. How should this loss contingency impact the balance sheet that is currently being prepared?
Do not accrue a loss contingency or disclose the lawsuit in a note. Patty's attorney believes there is very little chance that the company will lose in court and no settlement offer has been made. The loss is remote (rather than probable or even reasonably possible). Thus, a liability is not recorded and disclosure is not necessary.
Equinox is a local boutique that sells gift cards especially before holidays. At November 30, the company's Deferred gift card revenue account had a balance of $400. During December, the company sold additional gift cards in the amount of $5,000, customers redeemed $1,000 of gift cards, and unused gift cards in the amount of $300 expired. What is the balance of Deferred gift card revenue that will be reported at December 31?
Ending balance = Beginning balance of $400 + Gift cards sold of $5,000 − Gift cards redeemed of $1,000 − Gift cards expired of $300 = $4,100
Payson Company filed a lawsuit against Leer Company for $1 million. While the financial statements for Payson are being prepared, the company's attorney advises Payson's management that a settlement in the amount of $500,000 is probable in the case. The potential settlement is material to Payson's financial position. How should Payson reflect this situation in its financial statements?
Even if the receipt of the settlement is not probable, disclosure should be made. However, no accrual should be recorded. Since Payson is the plaintiff, the company should treat the settlement as a gain contingency. Gain contingencies are not accrued. However, material gain contingencies are disclosed in notes to the financial statements.
Record journal entries for extended warranties. Revenue from extended warranty: 60. Record adjusting entries for 3 years.
Extended warranty: D Cash: 60 C Deferred Revenue-extended rev: 60 Adjusting entries: Deferred Rev-extended rev: 20 Revenue-extended warranties: 20
E 13-3: The following selected transactions related to liabilities of United Insulation Corporation. United's Fiscal year ends on Dec. 31. Prepare the appropriate journal entry. Feb. 1: Arranged a three-month bank loan of $5 mil with Parish Bank under the line of credit agreement. Interest at the prime rate of 10% was payable at maturity. May 1: Paid the 10% note at maturity.
Feb 1. D Cash: 5,000,000 C NP: 5,000,000 May 1: D Int Exp (5mil*10%*3/12) 125,000 D NP (face amount): 5,000,000 C Cash: 5,125,000
Kent Company has a calendar year-end. On December 15, Year 1, a customer was injured using a product manufactured by Kent. That customer has not yet filed a lawsuit or made a claim. Kent has not yet distributed its Year 1 financial statements. What must Kent do with regards to those financial statements?
If it is probable that a claim will be asserted, it should be treated as if the claim had been asserted. The event giving rise to the unasserted claim arose before year-end. If management feels an assessment is probable, it must be treated as if the claim had been asserted. An estimated loss and contingent liability would be accrued only if an unfavorable outcome is probable and the amount can be reasonably estimated. Disclosure would be required only if an unfavorable settlement is only reasonably possible or if the settlement is probable but cannot be reasonably estimated.
BE 13-7: In Lizzie Shoes' experience, gift cards that have not been redeemed within 12 months are not likely to be redeemed. Lizzie Shoes sold gift cards for $18,000 during August 2021. $4,000 of cards were redeemed in September 2021, $3,000 in October, $2,500 in November, and $2,000 in December 2021. In 2022, an additional $1,000 of cards were redeemed in January and $500 in February. How much gift card revenue associated with the August 2021 gift card sales would Lizzie get to recognize in 2021 and 2022?
In 2021 Lizzie would recognize $11,500 of revenue: $4,000 + $3,000 + $2,500 + $2,000 - $11,500 In 2022 Lizzie would recognize the remainder of $6,500: $18,000 - $11,500 = $6,500 Either because gift cards were redeemed (the $1,000 in January and the $500 in February) or because they are viewed as expired.
At what amount should current liabilities be recorded?
In practice, liabilities payable within one year from the balance sheet date ordinarily are recorded at their maturity amounts
On February 1, Armstrong, Inc., borrowed $200,000 cash from First Bank under a noncommitted short-term line of credit arrangement and issued a three-month, 12% promissory note. Prepare the appropriate journal entry dated May 1 for the payment of principal and interest made at maturity. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
Interest = Face amount * Annual Rate * time to maturity Interest = $200,000*12%*3/12 = $6,000 D NP 200,000 D Interest Exp $6,000 C Cash 206,000
On October 1, Willette Company borrowed $120,000 cash and issued a six-month, 10% promissory note. Interest is payable at maturity. Willette has a calendar year-end and has not yet accrued any interest on the note. Prepare the appropriate adjusting entry dated December 31. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
Interest accrued = $120,000 * 10% * 3/12 = $3,000 D Int. Exp. $3,000 C Int. Pay. $3,000
Kylah Enterprises signs a 3-month, noninterest-bearing note with a stated rate of 13.5% and a maturity value of $215,000? What is the cash proceeds available to the borrower? (Round your answer to 2 decimal places.)
Interest for 3 months=face amount * Annual Rate * time maturity Interest for 3 months = $215,000 * 13.5% * 3/12 = $7,265.25 Cash proceeds available to borrower = face amount - interest for 3 months $215,000 - $7,265.25 = $207,743.75
BE 13-2: On October 1, Eder Fabrication borrowed $60 mil and issued a nine-month promissory note. Interest was discounted at issuance at a 12% discount rate. Prepare the journal entry for the issuance of the note and the appropriate adjusting entry for the note at December 31, the end of the reporting period.
Issuance of note: Discount: $60,000,000 × 12% × 9/12=$5,400,000 D Cash: 54,600,000 D Discount on notes payable 5,400,000 C Notes payable (face amount) $60,000,000 Adjusting entry Dec. 31: Interest Exp: $60,000,000 × 12% × 3/12=1,800,000 Interest expense 1,800,000 Discount on notes payable 1,800,000
BE 13-1: On October 1, Eder Fabrication borrowed $60 million and issued a nine-month, 12% promissory note. Interest was payable at maturity. Prepare the journal entry for the issuance of the note and the appropriate adjusting entry for the note at December 31, the end of the reporting period.
Issuance of note: D Cash 60,000,000 C Notes payable 60,000,000 Adjusting entry on Dec. 31: Interest expense: $60,000,000 × 12% × 3/12 Interest expense 1,800,000 Interest payable 1,800,000
BE 13-5: Life.com issued $10 million of commercial paper on April 1 on a nine-month note. Interest was discounted at issuance at a 6% discount rate. What is the effective interest rate on the commercial paper?
Issuance: Discount: $10,000,000 × 6% × 9/12=450,000 D Cash (difference) 9,550,000 D Discount on notes payable 450,000 C Notes payable (face amount) 10,000,000 Effective Interest Rate: Discount/Cash proceeds = Interest rate for 9 months*12/9 = Annual Effective $450,000/ $9,550,000 = 4.712%* 12/9 = 6.3%
BE 13-4: Branch Corporation issued $12 mil of commercial paper on March 1 on a nine-month note. Interest was discounted at issuance at a 9% discount rate. Prepare the journal entry for the issuance of the commercial paper and its repayment at maturity.
Issuance: Discount: $12,000,000 × 9% × 9/12= 810,000 D Cash 11,190,000 D Discount on notes payable 810,000 C Notes payable (face amount) 12,000,000 Recording of interest: D Interest expense 810,000 C Discount on notes payable 810,000 Repayment at maturity: D Notes payable (face amount) 12,000,000 C Cash 12,000,000
What is a current liability?
It is an obligation payable within one year from the balance sheet date, or within the firm's operating cycle, whichever is longer.
The following selected circumstances relate to pending lawsuits for Erismus, Inc. Erismus's fiscal year ends on December 31. Financial statements are issued in March 2022. Erismus prepares its financial statements according to U.S. GAAP. Indicate the amount Erismus would record as an asset, a liability or if no accrual would be necessary in the following circumstances. 2. Erismus is defending against a lawsuit. Erismus's management believes it is probable that the company will lose in court. If it loses, management believes that damages could fall anywhere in the range of $2,000,000 to $4,000,000, with any damage in that range equally likely.
Lia, 2 mil Erismus would recognize a liability of $2,000,000, as it is probable Erismus will lose in court, and U.S. GAAP requires accrual of the low end of a range of equally likely outcomes. There will also be note disclosure of the lawsuit.
The following selected circumstances relate to pending lawsuits for Erismus, Inc. Erismus's fiscal year ends on December 31. Financial statements are issued in March 2022. Erismus prepares its financial statements according to U.S. GAAP. Indicate the amount Erismus would record as an asset, a liability or if no accrual would be necessary in the following circumstances. 3. Erismus is defending against a lawsuit. Erismus's management believes it is probable that the company will lose in court. If it loses, management believes that damages will eventually be $5,000,000, with a present value of $3,500,000.
Lia. 5 mil Erismus would recognize a liability of $5,000,000, as it is probable that it will lose the case. Under U.S. GAAP companies typically do not discount litigation claims for the time value of money. There will also be note disclosure of the lawsuit.
Indicate how Note payable due April 4, 2024 should be reported in a balance sheet at Dec. 31, 2021.
Long-term Liability
Indicate how Short-term bank loan to be paid with proceeds of sale of common stock should be reported in a balance sheet at Dec. 31, 2021.
Long-term liability
What is a product warranty and how should this be accounted for?
Most consumer products are accompanied by a guarantee, such as a quality-assurance warranty. Costs of satisfying guarantees should be estimated and recorded as expenses in the same accounting period the products are sold.
E 13-19: At April 1, 2022, the Food and Drug Administration is in the process of investigating allegations of false marketing claims by Hulkly Muscle Supplements. The FDA has not yet proposed a penalty assessment. Hulkly's fiscal year ends on Dec. 31, 2021. The company's financial statements are issued in April 2022. For the following scenario, determine the appropriate way to report the situation. Management feels an assessment is reasonably possible, and if an assessment is made, an unfavorable settlement of $13 mil is reasonably possible.
No disclosure is required because an FDA claim is as yet unasserted, and an assessment is not probable.
At April 1, 2022, the Food and Drug Administration is in the process of investigating allegations of false marketing claims by Hulkly Muscle Supplements. The FDA has not yet proposed a penalty assessment. Hulkly's fiscal year ends on Dec. 31, 2021. The company's financial statements are issued in April 2022. For the following scenario, determine the appropriate way to report the situation. Management feels an assessment is reasonably possible, and if an assessment is made, an unfavorable settlement of $13 mil is probable.
No disclosure is required because an FDA claim is as yet unasserted, and an assessment is not probable. Even if an unfavorable outcome is thought to be probable in the event of an assessment and the amount is estimable, disclosure is not required unless an unasserted claim is probable.
At March 13, 2022, the Securities Exchange Commission is in the process of investigating a possible securities law violation by Now Chemical. The SEC has not yet proposed a penalty assessment. Now's fiscal year ends on Dec. 31 2021, and its financial statements are published in March 2022. Management feels an assessment is reasonably possible, and if an assessment is made, an unfavorable settlement of $13 mil is probable. What, if any, action should Now take for its financial statements?
No disclosure is required because, although an investigation is ongoing, no claim has yet been asserted, and an assessment is notprobable. Even if an unfavorable outcome is thought to be probable in the event of an assessment and the amount is estimable, disclosure is not required unless it is probable that an unasserted claim will be asserted.
E 13-3: The following selected transactions related to liabilities of United Insulation Corporation. United's Fiscal year ends on Dec. 31. Prepare the appropriate journal entry. Jan. 13: Negotiated a revolving credit agreement with Parish Bank that can be renewed annually upon bank approval. The amount available under the line of credit is $20 mil. at the bank's prime rate.
No entry is made for a line of credit until a loan actually is made. It would be described in a disclosure note.
How should a noninterest bearing note be accounted for?
Noninterest-bearing loans actually do bear interest, but the interest is deducted (or discounted) from the face amount to determine the cash proceeds made available to the borrower at the outset. E.g. a company sold a product worth $658,000 and accepted a noninterest bearing note from the customer of $700,000 due in six months. The difference of $42,000 ($700,000 − $658,000), is recorded as a discount on notes payable which is recognized as interest expense over time.
E 13-11: An annual report of Sprint Corporation contained a rather lengthy narrative entitled "Review of Segmental Results of Operation". The narrative noted that short-term notes payable and commercial paper outstanding at the end of the year aggregated $756 mil and that during the following year, "This entire balance will be replaced by the issuance of long-term debt or will continue to be refinanced under existing long-term credit facilities." How did Spring report the debt in its balance sheet? Why?
Normally, short-term debt (payable within a year) is classified as current liabilities. However, when such debt is to be refinanced on a long-term basis, it may be included with long-term liabilities. The narrative indicates that Sprint has both (1) the intent and (2) the ability ("existing long-term credit facilities") to refinance on a long-term basis. Thus, Sprint reported the debt as long-term liabilities.
The following selected circumstances relate to pending lawsuits for Erismus, Inc. Erismus's fiscal year ends on December 31. Financial statements are issued in March 2022. Erismus prepares its financial statements according to U.S. GAAP. Indicate the amount Erismus would record as an asset, a liability or if no accrual would be necessary in the following circumstances. 1. Erismus is defending against a lawsuit. Erismus's management believes the company has a slightly worse than 50/50 chance of eventually prevailing in court, and that if it loses, the judgment will be $1,000,000.
Not Accrued. $0 1.Erismus would not recognize a liability, as U.S. GAAP defines "probable" to be a likelihood of substantially more than "more likely than not". Rather, Erismus would view the loss as reasonably possible and provide disclosure in a note.
The following selected circumstances relate to pending lawsuits for Erismus, Inc. Erismus's fiscal year ends on December 31. Financial statements are issued in March 2022. Erismus prepares its financial statements according to U.S. GAAP. Indicate the amount Erismus would record as an asset, a liability or if no accrual would be necessary in the following circumstances. 4. Erismus is a plaintiff in a lawsuit. Erismus's management believes it is probable that the company eventually will prevail in court, and that if it prevails, the judgment will be $1,000,000.
Not accrued, $0 This is a gain contingency. Gain contingencies are not accrued under U.S. GAAP. A disclosure note is appropriate if the amount is deemed material.
The following selected circumstances relate to pending lawsuits for Erismus, Inc. Erismus's fiscal year ends on December 31. Financial statements are issued in March 2022. Erismus prepares its financial statements according to U.S. GAAP. Indicate the amount Erismus would record as an asset, a liability or if no accrual would be necessary in the following circumstances. 5. Erismus is a plaintiff in a lawsuit. Erismus's management believes it is virtually certain that the company eventually will prevail in court, and that if it prevails, the judgment will be $500,000.
Not accrued, $0. This is a gain contingency. Gain contingencies are not accrued under U.S. GAAP. A disclosure note is appropriate if the amount is deemed material.
Indicate how Unasserted assessment of taxes owed on prior-year income with a reasonable possibility of being asserted, in which case there would probably be a loss in 13 months should be reported in a balance sheet at Dec. 31, 2021.
Not reported.
On November 1, 2021, Quantum Technology, a geothermal energy supplier, borrowed $16 million cash to fund a geological survey. The loan was made by Nevada BancCorp under a noncommitted short-term line of credit arrangement. Quantum issued a nine-month, 12% promissory note. Interest was payable at maturity. Quantum's fiscal period is the calendar year. 1. Prepare the journal entry for the issuance of the note by Quantum Technology. 2. & 3. Prepare the appropriate adjusting entry for the note by Quantum on December 31, 2021 and journal entry for the payment of the note at maturity.
Nov. 1: D Cash 16,000,000 C NP 16,000,000 Dec. 31: D Int. Exp. 320,000 C Int. Pay. 320,000 $16,000,000*12%*2/12 = $320,000 July 31: D Int Exp 1,120,000 D Int Pay 320,000 D NP 16,000,000 C Cash 17,440,000 Interest expense ($16,000,000 × 12% × 7/12) = $1,120,000 Interest payable (from adjusting entry) = $320,000 Notes payable (face amount) = $16,000,000 Cash (total) = $17,440,000
BE 13-17: Household Solutions manufactures kitchen storage products. During the year, the company became aware of potential costs due to (1) a recently filed lawsuit for patent infringement for which the probability of loss is remote and damages can be reasonably estimated, (2) another recently filed lawsuit for food contamination by the plastics used in Household Solutions' products for which a loss is probable but the amount of loss cannot be reasonably estimated, and (3) a new product warranty that is probable and can be reasonably estimated. Which, if any, of these costs should be accrued?
Only the situation (3) cost should be accrued. A liability should be accrued for a loss contingency if it is both probable that the confirming event will occur and the amount can be at least reasonably estimated. If one or both of these criteria is not met, but there is at least a reasonable possibility that the loss will occur, a disclosure note should describe the contingency. Both criteria are met only for the warranty costs.
A company should accrue a loss contingency only if the likelihood that a liability has been incurred is?
Probable and the amount of the loss can be reasonably estimated.
Record the journal entries. A company sold a product worth $658,000 and accepted a noninterest bearing note from the customer of $700,000 due in six months. Record the journal entry for the purchase of the inventory and the payment of the note.
Purchase of inventory: D Inventory: $658,000 D Discount on NP: $42,000 C Notes Payable: $700,000 Payment of NP: D Interest Expense: 42000 C Discount on NP: 42000 D NP: $700.000 C Cash: $700,000
Gain contingencies usually are recognized in a company's income statement when?
Realized
BE 13-8: During December, Rainey Equipment made a $600,000 credit sale. The state sales tax rate is 6% and the local sales tax rate is 1.5%. Prepare the appropriate journal entry.
Sales tax: $600,000*(6%+1.5%)= 45,000 D AR 645,000 C Sales Rev $600,000 C Sales Taxes Payable: $45,000
What are short-term notes payable?
Short-term notes payable or short-term bank loans are a form of temporary financing, where a corporation borrows cash from a bank and signs a promissory note (essentially an IOU).
BE 13-14: Skill Hardware is the plaintiff in a $16 mil lawsuit filed against a supplier. The litigation is in final appeal and legal counsel advises that it is virtually certain that Skill will win the lawsuit and be awarded $12 mil. How should Skill account for this event?
Skill should disclose the $12 million gain contingency in a note, but not accrue it. Gain contingencies are not accrued even if the gain is probable and reasonably estimable. The gain should be recognized only when realized.
Weekly News, Inc., publishes a weekly newspaper 52 weeks out of the year. The company sells one-year subscriptions to its newspaper for $52 collected in advance. During its first year of operations, the company sold subscriptions to 1,000 customers. By the end of that first year, on average, customers had received 13 weekly copies. What is the amount of subscription revenue that should be reported on the income statement for that first year of operations?
Subscriptions collected in advance = 1,000 customers × $52 per customer = $52,000 Subscriptions revenue recognized = $52,000 × 13/52 = $13,000
When should noncurrent liabilities be reclassified as current?
The following noncurrent liabilities must be reclassified as current liabilities: -Long-term obligations such as bonds and notes payable are reported as current liabilities when they become payable within the upcoming year. -Debt that is callable (due on demand) by the creditor in the upcoming year/operating cycle. -When the creditor has the right to demand payment because an existing violation of a provision of the debt agreement makes it callable.
Sunbed Company sells tanning beds that are shipped in large reusable containers. Customers are charged a deposit for each container delivered and receive a refund when the container is returned. The deposit is three times the actual cost of each container. Deposits are forfeited if containers are not returned within one year. The inventory of containers remains on the company's books until deposits are forfeited. Deposits collected on containers delivered during the year were $100,000. Ninety-five percent of the containers were returned within the allotted time. Prepare the appropriate journal entry for the deposits returned to customers. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
The liability account needs to be reduced by the cash refunds that are made to customers as the containers are returned. Cash refunds = Deposits collected of $100,000 × 95% return percentage = $95,000 D Liability - refundable deposits 95,000 C Cash 95,000
Annually, Monet Corp. awards each of its employees two weeks of paid vacation, which can be carried over if not used. As of December 31, Year 1, the company determined that there are 20 vacation weeks eligible for carryover. During Year 1, compensation averaged $1,000 per week. That average compensation amount is expected to increase to $1,030 during Year 2 when that vacation time will be taken. What is the liability that should be reported for vacation pay in the company's balance sheet prepared as of December 31, Year 1?
The liability for paid absences usually is accrued at the existing wage rate rather than at a rate estimated to be in effect when the absences occur. 20 carryover weeks × Average compensation during Year 1 of $1,000 per week = $20,000
E13-20: The following selected transactions relate to contingencies of Classical Tool Makers, Inc., which began operations in July 2021. Classical's fiscal year ends on Dec. 31. Financial Statements are issued in April 2022. Prepare the year-end entries for any amounts that should be recorded as a result of each of these contingencies and indicate whether a disclosure note is indicated. Classical is plaintiff in a $4 mil lawsuit filed against a supplier. The suit is in final appeal and attorneys advise that it is virtually certain that Classical will win the case and be awarded $2.5 mil.
This is a gain contingency. Gain contingencies are not accrued even if the gain is probable and reasonably estimable. The gain should be recognized only when realized. Disclosure note indicated: Yes
BE 13-13: Consultants notified management of Goo Goo Baby Products that a crib toy poses a potential health hazard. Counsel indicated that a product recall is probable and is estimated to cost the company $5.5 million. How will this affect the company's income statement and balance sheet this period?
This is a loss contingency and should be accrued because it is both probable that the confirming event will occur and the amount can be at least reasonably estimated. Goo Goo should report a $5.5 million loss in its income statement and a $5.5 million liability in its balance sheet.
BE 13-12: Right Medical introduced a new implant that carries a five-year warranty against manufacturer's defects. Based on industry experience with similar product introductions, warranty costs are expected to approximate 1% of sales. Sales were $15 million and actual warranty expenditures were $20,000 for the first year of selling the product. What amount should Right report as a liability at the end of the year?
This is a loss contingency and the estimated warranty liability is credited and warranty expense is debited in the period in which the products under warranty are sold. Right will report a liability of $130,000: Warranty Liability: Warranty expense -actual warranty expenditures = balance Warranty expense (15 mil*1%) = 150,000- 20,000 = 130,000
E 13-20: The following selected transactions relate to contingencies of Classical Tool Makers, Inc., which began operations in July 2021. Classical's fiscal year ends on Dec. 31. Financial Statements are issued in April 2022. Prepare the year-end entries for any amounts that should be recorded as a result of each of these contingencies and indicate whether a disclosure note is indicated. In Dec. 2021, the state of TN filed suit against Classical, seeking penalties for violations of clean air laws. On Jan. 23, 2022, Classical reached a settlement with state authorities to pay $1.5 mil in penalties.
This is a loss contingency. Classical can use the information occurring after the end of the year and before the financial statements are issued to determine appropriate disclosure. D Loss—litigation . 1,500,000 C Liability—litigation 1,500,000 Disclosure note indicated: Yes
What is a secured short-term loan?
This is where a short-term loan is secured by a specified asset of the borrower such as inventory or accounts receivable. When accounts receivable serve as collateral, this is referred to as pledging accounts receivable. Where receivables are sold outright to a finance company as a means of short-term financing it is called factoring receivables.
Record journal entries for the sale of gift cards and redemption. A corporation sold $2 million of gift cards. $1.5 million of gift cards sold in prior periods were redeemed by customers.
To record the sale: D Cash: 2.000.000 C Deferred GC Rev: $2,000,000 To record the redemption: D Gift Card Revenue: 1,500,000 C Revenue-Gift Cards: 1,500.,000
BE 13-10: Coulson Company is in the process of refinancing some long-term debt. Its fiscal year ends on Dec. 31, 2021, and its financial statements will be issued on March 15, 2022. Under current US GAAP, how would the debt be classified if the refinancing is completed on December 15, 2021? What if instead it is completed on January 15, 2022?
Under U.S. GAAP, the debt would be classified as long-term for both completion dates, as what is key is that the refinancing be completed before the financial statements are issued.
Record journal entries for adjusting entry and when a warranty is claimed ($61,000 in 2022). In 2021, a corporation sold $2 million of products with a two-year warranty against defects. Estimates based on industry experience indicate warranty costs of 3% of sales during the first 12 months following the sale and 4% the next 12 months.
Warranty Estimate: $2 mil * (3% + 4%) = $140,000 Adjusting on Dec 31: D Warranty Expense: $140,000 C Warranty Liability: $140,000 When Customer makes claim: D warranty Liability: $61,000 C Cash: $61,000
Manor Inc. sells washing machines that include a two-year warranty covering parts. Experience shows that warranty expense averages about 2% of the selling price of each machine during the first 12 months following the sale and 1% during the next 12 months. Net sales totaled $400,000 during Year 1, the company's first year of operations. Actual warranty costs incurred totaled $7,900 during Year 2 and $4,000 during Year 3. What is the amount of warranty expense that should be reported on the income statement for Year 1?
Warranty expense = (2% + 1%) × $400,000 = $12,000
How should revenue from the sale of gift cards be accounted for?
When a company sells a gift card, it initially records the cash received as deferred revenue, and then recognizes revenue either when the gift card is redeemed or when expired.
Record the journal entries when advance is collected and when products are delivered. A magazine company collected $20 million in advance representing annual subscriptions for magazines to be delivered monthly. At December 31, the average subscription was one-fourth expired.
When advance is collected: D Cash: $20 mil C Deferred Subscription Revenue: $20 mil When products are delivered: D Deferred Subscription revenue: $5 mil C Subscription Revenue: $5 mil
Record the journal entries when deposits are collected and when the containers are returned. Deposits collected on containers delivered during the year were $300,000. 90% of the containers were returned within the allotted time.
When deposits are collected: D Cash: $300,000 C Liability-refundable deposits: $300,000 When containers are returned: D Liability-refundable deposits: $270,000 C Cash: $270,000
Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under contract with Volt. Based on prior experience, warranty costs are estimated to be $25 per item sold. Volt should recognize these warranty costs?
When the equipment is sold
During 2021, Deluxe Leather Goods issued 841,000 coupons which entitles the customer to a $5.10 cash refund when the coupon is submitted at the time of any future purchase. Deluxe estimates that 74% of the coupons will be redeemed. 263,000 coupons had been processed during 2021. Deluxe recognizes coupon expense in the period coupons are issued. At December 31, 2021, Deluxe should report a liability for unredeemed coupons of?
[(841,000 × 74%) − 263,000] × $5.10 = $1,832,634 [(amount of coupons * percentage expected to be redeemed) - actually redeemed coupons] * cost of each coupon = unredeemed coupon lia
BE 13-3: On July 1, Orcas Lab issued a $100,000, 12%, eight-month note. Interest is payable at maturity. What is the amount of interest expense that should be recorded in a year-end adjusting entry if the fiscal year-end is (a) December 31? (b) September 30?
a. December 31 $100,000 × 12% × 6/12 = $6,000 b. September 30 $100,000 × 12% × 3/12 = $3,000
A contingent liability must be accrued as a liability when the loss is: (Select all that apply.) a. Probable. b. Reasonably possible. c. Remote. d. Not reasonably estimable. e. Reasonably estimable.
a. Probable. e. Reasonably estimable.
Which of the following is not true about deferred revenue? a. Deferred revenue with respect to gift cards is recognized as revenue when the gift cards expire. b. Deferred revenue is a liability. c. Deferred revenue is recognized on credit sales when collectibility can be estimated. d. Customer prepayments typically require recognition of deferred revenue.
c. Deferred revenue is recognized on credit sales when collectibility can be estimated.
Which of the following statements about short-term obligations that are expected to be refinanced is true? a. Short-term obligations that are expected to be refinanced on a long-term basis must be reported as current liabilities. b. Short-term obligations that are expected to be refinanced on a long-term basis can be reported as noncurrent liabilities only if the company intends to refinance on a long-term basis. c. Short-term obligations that are expected to be refinanced on a long-term basis can be reported as noncurrent liabilities only if the company intends to refinance on a long-term basis and the company has actually demonstrated the ability to refinance on a long-term basis. d. The ability to refinance on a long-term basis can be demonstrated by either an existing refinancing agreement or actual financing prior to the date of the balance sheet.
c. Short-term obligations that are expected to be refinanced on a long-term basis can be reported as noncurrent liabilities only if the company intends to refinance on a long-term basis and the company has actually demonstrated the ability to refinance on a long-term basis.
Current liabilities normally are recorded at their?
c. maturity amount
Indicate how A determinable loss from a past event that is contingent on a future event that appears extremely likely to occur in three months should be reported in a balance sheet at Dec. 31, 2021.
current liability
Indicate how Long-term bonds callable by the creditor in the upcoming year that are not expected to be called.should be reported in a balance sheet at Dec. 31, 2021.
current liability
Indicate how an unasserted assessment of taxes owed on prior-year income that probably will be asserted, in which case there would probably be a loss in six months should be reported in a balance sheet at Dec. 31, 2021.
current liability
Which of the following situations would not require that long-term liabilities be reported as current liabilities on a classified balance sheet? a. The long-term debt is callable by the creditor. b. The creditor has the right to demand payment due to a contractual violation. c. The long-term debt matures within the upcoming year. d. The company intended to refinance the debt and did so prior to issuance of the financial statements.
d. The company intended to refinance the debt and did so prior to issuance of the financial statements.
