Solution manual intermediate accounting 9e ch12

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER 12 CURRENT LIABILITIES AND CONTINGENCIES CONTENT ANALYSIS OF EXERCISES AND PROBLEMS Number Content Time Range (minutes) E12-1 Cash Discounts Accounts payable, perpetual inventory system Net-of-cash discount approach Journal entries 5-10 E12-2 Notes Payable Periodic inventory system, interest-bearing Journal entries to record transactions 5-10 E12-3 Notes Payable Non-interest-bearing Journal entries, balance sheet disclosure Effective interest rate calculation 10-15 E12-4 Notes Payable Discounted, present value techniques Journal entries, balance sheet disclosure 10-15 E12-5 Compensated Absences No sick leave taken Journal entries, balance sheet disclosure 5-10 E12-6 Sales Taxes Journal entries to record various transactions 5-10 E12-7 Payroll Payroll taxes Journal entries to record payroll transactions 5-10 E12-8 Bonus Obligation Computation of bonus and income tax expense 5-10 E12-9 Property Taxes Monthly journal entries Amount of year-end liability 5-10 E12-10 Property Taxes Accruals Journal entries to record all property tax transactions 10-15 E12-11 Expense Warranty Accrual Method Journal entries, balance sheet disclosure 10-15 E12-12 Sales Warranty Accrual Method Journal entries, balance sheet disclosure 10-15 E12-13 Premium Obligation Journal entries to record sale, premium plan Balance sheet disclosure 10-20 E12-14 Premium Obligation Journal entries to record premium promotion Balance sheet disclosure 10-15 12-1 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Number Content Time Range (minutes) E12-15 Gift Certificates Journal entries to record transactions Balance sheet disclosure 10-15 E12-16 Loss Contingency Necessary journal entries and/or disclosures 15-20 E12-17 Gain Contingency Discussion of accounting treatment as called for by FASB Statement No 5-10 E12-18 Serial Bonds Balance sheet disclosure of serial bonds payable 5-10 E12-19 Short-Term Debt Expected to be refinanced Balance sheet disclosure 5-15 E12-20 Short-Term Debt Refinanced Balance sheet disclosure 5-15 P12-1 Cash Discounts Accounts payable, net-of-cash-discount method Journal entries, balance sheet disclosure Current ratio calculation 20-30 P12-2 Notes Payable Interest-bearing, non-interest-bearing Computation of cash received, effective interest rate, interest expense Journal entries 20-30 P12-3 Trade Note Transactions Interest-bearing Journal entries to record transactions Year-end adjusting entries 20-30 P12-4 Compensated Absences Sick pay, vacation pay Journal entries, balance sheet disclosure 30-40 P12-5 Sales Taxes Journal entries, balance sheet disclosure 10-20 P12-6 Payroll Payroll taxes Calculation of tax amount Journal entries 20-30 P12-7 Bonus Obligation Computation of total compensation and income tax expense 15-20 P12-8 Property Taxes Monthly journal entries Balance sheet disclosure 20-35 P12-9 Expense Warranty Accrual Method Journal entries, balance sheet disclosure 20-30 P12-10 Sales Warranty Accrual Method Implied service contract Journal entries 15-20 P12-11 Premium Obligation Journal entries to record sales, purchases, redemptions Closing entries Month-end balance sheet disclosures 30-40 P12-12 Contingencies Journal entries for various types of contingencies Explanations 15-20 12-2 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Number Content Time Range (minutes) P12-13 (AICPA adapted) Contingencies Determine journal entries or note disclosures for subscriptions, self-insurance, and two lawsuits 20-30 P12-14 Short-Term Debt Expected to be refinanced Balance sheet disclosure before and after refinancing 20-30 P12-15 Short-Term Debt Expected to be refinanced Balance sheet disclosure 10-20 P12-16 Notes Payable Non-interest-bearing Present value techniques Journal entries, balance sheet disclosure 30-40 P12-17 Comprehensive Various current liabilities Journal entries 30-40 P12-18 Comprehensive Various current liabilities Journal entries 30-45 ANSWERS TO QUESTIONS Q12-1 Liabilities are probable future sacrifices of economic benefits arising from present obligations of a company to transfer assets or provide future services to other entities in the future as a result of past transactions or events Probable refers to what can reasonably be expected or believed based on available evidence or logic but is neither certain nor proved Obligations refer to duties imposed legally or socially which one is bound to by contract, promise, moral responsibility, and so forth Q12-2 A legal liability is a liability legally requiring payment to others These liabilities are incurred in exchange transactions that are contractual in nature and require payment of cash or provision of services to specified or determinable entities on demand at specified or determinable dates on occurrence of specific events Examples are accounts payable, notes payable, and sales taxes payable Nonlegal liabilities are those where there is no legal requirement for assets to be transferred, yet a transfer of assets typically occurs as a part of the normal operations of a business Examples of nonlegal liabilities are obligations for vacation pay and year-end bonuses to employees Q12-3 The three essential characteristics of a liability identified in FASB Statement of Financial Accounting Concepts No are: It involves a present duty or responsibility of a company to one or more other entities that will be settled by the probable future transfer or use of assets at a specified or determinable date, on occurrence of a specified event, or on demand The duty or responsibility obligates the company, leaving it little or no discretion to avoid the future sacrifice The transaction or other event obligating the company has already happened 12-3 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Q12-3 (continued) The main features of these characteristics are the transfer or use of assets, the requirement for settlement of the obligation, and the fact that the liability transaction must have already occurred Q12-4 False As long as payment or other transfer of assets to settle an existing obligation is probable, a company does not need to know the identity of the recipient before the time of settlement Q12-5 The primary issues include: (a) the identification of liabilities the detection of a company's obligations; (2) the measurement or valuation of the liabilities and the related expense the determination of an amount to attach to each debt and to match as an expense against revenues; (3) the reporting of the liabilities on the balance sheet the specific disclosures in both the company's financial statements and the related notes Q12-6 The operating cycle of a company is the period of time that elapses between the use of cash to buy inventory; the sale of this inventory resulting in accounts receivable; and the collection of these receivables in cash Q12-7 The liquidity of liabilities is important in accounting for them because investors, creditors, and other decision makers evaluate future cash flows in their decisionmaking processes In part, these cash flows are predicted based on the nearness to cash of liabilities and assets Q12-8 Conceptually, a company should record and report on its balance sheet all liabilities at the present value of the future outlays they will require; however, current liabilities are valued at their face amount Due to the short time period involved, the difference between the maturity amount and the present value of current liabilities is not material The slight overstatement which results from recording at their maturity amount is justified on the basis of cost/benefit and materiality constraints Q12-9 A non-interest-bearing note is an unconditional written agreement whereby the borrower receives the face value of the note less the interest deducted in advance The proceeds are computed by multiplying the face value times the interest rate times the fraction of a year until maturity, and then subtracting this amount from the maturity value Q12-10 Compensated absences are employee absences for which pay is received, including vacation, holiday, illness, or other personal activities Such items as severance pay, stock options, and long-term fringe benefits are not included A company accounts for compensated absences by recording an expense and accruing a liability if: (1) the obligation is attributable to employee services already rendered, (2) it relates to rights that accumulate, (3) payment is probable, and (4) the amount can be reasonably estimated If all conditions are met except the ability to make a reasonable estimate, the company discloses the facts relating to the other conditions in the notes to its financial statements Q12-11 A new current liability arises for a company selling inventory and agreeing to repurchase it later A liability is recorded for the proceeds received 12-4 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Q12-12 Under the expense warranty accrual method, a company recognizes in the period of sales the estimated warranty expense and a liability for future performance under the warranty provisions Under the sales warranty accrual method, a company assumes that its revenue from the implied warranty contract is equal to the estimated warranty costs, and it defers and recognizes revenue in an amount equal to the warranty costs incurred Under the modified cash basis, a company records warranty costs as an expense during the period in which the repairs are made to merchandise under warranty Q12-13 A contingency is an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss that will ultimately be resolved when one or more future events occur or fail to occur Here, "uncertainty" means that a company is uncertain about the outcome of the future event which will either confirm or deny that a liability exists due to an event that has already taken place Q12-14 The matching principle refers to the fact that a company should match expenses arising from an existing condition with current revenues To wait until the contingency is confirmed to account for it would overstate current income and understate future income Accounting for contingencies is conservative because generally only loss contingencies are allowed to be accrued Gain contingencies are usually not recognized until they are actually realized Q12-15 The two criteria that must be met before a loss contingency is accrued in a company's accounts are: (1) it is probable that one or more future events will confirm the fact that a loss has been incurred, and (2) the amount of the loss can be reasonably estimated Q12-16 The event giving rise to a possible loss must have occurred by the balance sheet date A company has until the date of issuance of the financial statements to assess the probability of loss Q12-17 The conditions that must be met for a company to accrue the loss from an unfiled lawsuit include: The event giving rise to the possible lawsuit must have occurred prior to the date of the financial statements It is probable that a claim will be filed It is probable that the outcome of the suit will be unfavorable The loss can be reasonably estimated Q12-18 A gain contingency is an existing condition involving uncertainty as to a possible gain that will be resolved when one or more future events occur or fail to occur Resolution of the uncertainty may confirm the acquisition of an asset, or the reduction of a liability A gain contingency usually is disclosed in the notes to the company's financial statements 12-5 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Q12-19 The two criteria that must be met before a company can classify a short-term debt that is expected to be refinanced as a noncurrent liability are (1) the company intends to refinance on a long-term basis, and (2) it has the ability to refinance on a long-term basis Q12-20 A company demonstrates the ability to refinance currently maturing short-term debt in one of two ways: The company has issued long-term debt or equity for the short-term debt after the date of its balance sheet but before that balance sheet is issued The company has entered into a bona fide long-term financing agreement before the balance sheet is issued that clearly permits the company to refinance the short-term debt on a long-term basis Q12-21 This question could be answered in two different ways First, the student could agree with provisions of FASB Statement No 78 on the legal basis that the payments can in fact be required to be made within one year (or operating cycle, if longer) and therefore a company should report the amounts as current liabilities Or, the student could disagree with the Statement and use the conceptual framework argument that if the obligations are not reasonably expected (i.e., is not probable to be paid) to require either the use of existing current assets or the creation of other current liabilities within a year or an operating cycle, whichever is longer, then a company should not classify them as current liabilities ANSWERS TO CASES C12-1 Yes, because (a) it has borrowed money before the due date of the short-term note, thereby establishing the intent to refinance on December 31, 2004; and (b) it has demonstrated the ability to refinance Only $60,000 could be reclassified as noncurrent because this is the maximum amount borrowed or available to be borrowed under the agreement No, the effect would not be the same The short-term debt would have to be paid by use of current assets after the balance sheet date (on February 19) and the assets later replaced by issuing long-term debt (on February 26) FASB Interpretation No states that in this case the short-term obligation cannot be excluded from current liabilities at the balance sheet date C12-2 Warder must show intent and ability to refinance the convertible bonds on a long-term basis before its financial statements are issued to properly exclude these maturing convertibles from current liabilities 12-6 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com C12-2 (continued) The refinancing agreement must allow Warder to borrow for the entire amount of the note to be able to exclude the full amount from current liabilities Since the refinancing agreement was entered into before the statement issuance date this treatment would be proper If the stockholders will confirm that they will not make demand for payment within the next year or operating cycle, then the notes payable may be omitted If Warder plans to hold the deposits for longer than one year or one operating cycle, whichever is longer, after the balance sheet date, then it can exclude this amount from current liabilities C12-3 (AICPA adapted solution) a The two basic requirements for the accrual of a loss contingency (probability of loss and reasonable estimation) are the results of the interaction of several concepts of accounting theory Three of these concepts are (1) periodicity (time periods), (2) measurement, and (3) objectivity The first of these concepts relates to the first characteristic of an event necessary before accruing a loss contingency, and the second and third concepts listed relate to the second necessary requirement for the accrual of a loss contingency The first requirement that must be satisfied for the accrual of a loss contingency is that at a time prior to the issuance of the financial statements there is an indication that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements A basic objective in the recognition of losses is to record them in the particular period in which they are incurred With respect to the accrual of a loss contingency, a probable loss should be recognized in the same period in which it resulted in the probable impairment of an asset or the probable incurrence of a liability The failure to accrue the loss contingency in the period of occurrence will generally overstate earnings initially and understate earnings in future periods The second requirement for the accrual of a loss contingency states that the amount of the loss must be reasonably estimable The concept of measurement requires that the event must be quantifiable in terms of a standard unit of measure (dollars) In the case of a loss contingency related to the period covered in the current financial statements, the exact timing and magnitude of the loss may not be known in advance, but based on past experience or other methods of analysis, a reasonable estimate of the loss contingency can be made In making the estimate, the probability that a reasonable amount will be determined statistically is enhanced by a large population of accounts from which the probable loss will occur (law of large numbers) Also related to the reasonable estimation of the probable future loss, the concept of objectivity requires that the estimate be supported by quantitative data The basis for the estimate must yield essentially the same estimate when computed by different individuals using the available supporting data The concept of objectivity is supportive of the contention that future events will confirm the occurrence of a loss at the date of the financial statements Of course the loss must be probable as well as estimable and justified in light of future events 12-7 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com C12-3 (continued) b Situation I When a company sells a product subject to a warranty, it is probable that there will be expenses incurred in future accounting periods relating to revenues recognized in the current period As such, a liability has been incurred to honor the warranty at the same date as the recognition of the revenue Based on prior experience or technical analysis, the occurrence of warranty claims can be reasonably estimated and a probable dollar estimate of the liability can be made The contingent liability for warranties meets both of the requirements for the accrual of a loss contingency, and the estimated amount of the loss should be reflected in the financial statements In addition to recording the accrual, it may be advisable to disclose the factors used in arriving at the estimate by means of a note especially when there is a possibility of a greater loss than was accrued Situation II Even though (1) there is a probable loss on the contract, (2) the amount of the loss can be reasonably estimated, and (3) the likelihood of the loss was discovered prior to the issuance of the financial statements, the fact that the contract was entered into subsequent to the date of the financial statements precludes accrual of the loss contingency in financial statements for periods prior to the incurrence of the loss However, the fact that a material loss has been incurred subsequent to the date of the financial statements but prior to their issuance should be disclosed by means of a note to the financial statements The disclosure should contain the nature of the contingency and an estimate of the amount of the probable loss or a range into which the loss will probably fall Situation III The fact that a company chooses to self-insure the contingency of injury to others caused by its vehicles is not basis enough to accrue a loss contingency that has not occurred at the date of the financial statements An accrual or "reserve" cannot be made for the amount of insurance premium that would have been paid had a policy been obtained to insure the company against this particular risk A loss contingency may only be accrued if prior to the date of the financial statements a specific event has occurred that will impair an asset or create a liability and an amount related to that specific occurrence can be reasonably estimated The fact that the company is self-insuring this risk should be disclosed by means of a note to alert the financial statement reader to the exposure created by the lack of insurance C12-4 (AICPA adapted solution) An estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met: a Information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss b The amount of loss can be reasonably estimated 12-8 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com C12-4 (continued) Disclosure should be made for an estimated loss from a loss contingency that need not be accrued by a charge to income when there is at least a reasonable possibility that a loss may have been incurred The disclosure should indicate the nature of the contingency and should estimate the possible loss or range of loss or state that such an estimate cannot be made Disclosure of a loss contingency involving an unasserted claim is required when it is probable that the claim will be asserted and there is a reasonable possibility that the outcome will be unfavorable C12-5 (AICPA adapted solution) (a) Notes to Supey's 2004 financial statements should disclose the nature of the loss on cleanup and indicate that an estimate of the loss, or range of the loss, cannot be made No accrual should be made because the loss cannot be reasonably estimated and accrual of an uncertain amount would impair the integrity of the financial statements (b) Supey should disclose the nature of Gap's claim in the notes to the 2004 financial statements Disclosure should include an estimate of the potential loss Supey should not accrue the loss because it is only reasonably possible that it will have to pay for Gap's losses An estimated loss on the purchase commitment, equal to the unrecoverable amount of the contract price, should be reported as part of 2004 income from continuing operations and as a current liability at December 31, 2004 The net loss on the purchase commitment should be measured and recognized in the period in which it occurs Since Supey did not hedge this contract, reporting this loss recognizes the commitment's impact on future cash flows C12-6 (AICPA adapted solution) Angela should report the estimated loss from the safety hazard as an expense in the income statement and a liability in the balance sheet because both of the following conditions were met: a It is considered probable that liabilities have been incurred b Based on past experience, a reasonable estimate of the amount of loss can be made In addition, Angela should disclose the nature of the safety hazard in the notes to the financial statements Angela should not report the estimated loss from the noninsurable flood risk as an expense in the income statement or a liability in the balance sheet because no losses have occurred since the warehouse has been uninsured and the asset has not been impaired Thus, a loss has not been recognized and a liability does not exist Furthermore, disclosure of the noninsurable risk in the notes to the financial statements is not required because no losses have occurred since the warehouse has been uninsured Disclosure in the notes to the financial statements is permitted, however 12-9 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com C12-6 (continued) The purchase of the movie tickets should be accounted for by debiting an asset account-movie tickets inventory and crediting cash An accrual for the estimated promotion expense and liability should be accounted for by debiting promotion expense and crediting an accrued liability for those costs associated with 60 percent of the coupons issued The coupons actually redeemed this year should be accounted for by debiting the accrued liability and crediting the asset account movie tickets inventory for 40 percent of the coupons C12-7 Since the wreck occurred on January 15, 2005 and not on or before December 31, 2004, no asset has been impaired or liability incurred at the balance sheet date If the accident had occurred on or before the balance sheet date, the loss would have been accrued and a liability established, given that the damages were subject to reasonable estimation Note: As discussed in Chapter 3, however, since this is a "subsequent event" it would be disclosed in a note to the financial statements C12-8 The loss should be accrued and a liability recorded because: A liability has been incurred at December 31, 2004 due to the faulty Stallions The amount of the loss is reasonably estimable The journal entry to record the contingency is as follows: Estimated Loss on Stallions Estimated Liability 9,000,000 9,000,000 C12-9 (AICPA adapted solution) Skinner should report the potential costs due to the discovery of a possible product defect as an expense or loss in the income statement and as a liability in the balance sheet In addition, Skinner should disclose the nature of the costs due to the discovery of a possible product defect Accrual and disclosure are required if both of the following conditions are met: (a) It is considered probable that a liability has been incurred (b) The amount of loss can be reasonably estimated In this case both conditions are met Skinner should not report the potential claim for damages that may be received next year in the current year's income statement or balance sheet Gain contingencies usually are not recorded in the accounts in advance of their realization However, adequate disclosure should be made of gain contingencies, but care should be exercised to avoid misleading implications as to the likelihood of realization 12-10 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P12-4 (continued) REXALLO COMPANY Partial Balance Sheet March 31, 2005 Current Liabilities Liability for employee compensation for future absences $9,000 P12-5 Cash ($1,665,400 x 1.05) Sales Sales Taxes Payable 1,748,670 Accounts Receivable ($2,820,500 x 1.05) Sales Sales Taxes Payable 2,961,525 Sales Taxes Payable Cash 168,220 1,665,400 83,270 2,820,500 141,025 168,220 MAULDIN COMPANY Partial Balance Sheet December 31, 2004 Current Liabilities Sales taxes payable $ 56,075 P12-6 Johnson Long Morse Stewart Sharpe Ledbetter Totals F.I.C.A Wages $ 27,000 18,000 80,000* 28,000 26,000 30,000 $209,000 Unemployment Tax Wages $ 7,000 7,000 7,000 7,000 7,000 7,000 $42,000 *The maximum amount subject to FICA tax 12-32 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P12-6 (continued) (continued) State unemployment tax $42,000 x 0.044 = Federal unemployment tax $42,000 x 0.008 = F.I.C.A $209,000 x 0.08 = Total payroll taxes $ 1,848 336 16,720 $18,904 Salaries and Wages Expense Employees' Income Taxes Withholding Payable F.I.C.A Taxes Payable Cash 214,000 42,800* 16,720 154,480 *$214,000 total wages x 0.20 Payroll Tax Expense F.I.C.A Taxes Payable Federal Unemployment Taxes Payable State Unemployment Taxes Payable P12-7 Bonus = 0.10 ($5,000,000 - B - T) Taxes = 0.30 ($5,000,000 - B) B = = = = 1.07 B = B = 0.10 [$5,000,000 - B - 0.30 ($5,000,000 - B)] 0.10 ($5,000,000 - B - $1,500,000 + 0.30 B) 0.10 ($3,500,000 - 0.70 B) $350,000 - 0.07 B $350,000 $327,102.80 T = 0.30 ($5,000,000 - $327,102.80) = 0.30 ($4,672,897.20) = $1,401,869.16 Check: B = 0.10 ($5,000,000 - $327,102.80 - $1,401,869.26) = 0.10 ($3,271,028.04) = $327,102.80 12-33 18,904 16,720 336 1,848 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P12-7 2004 Dec (continued) 31 Salaries Expense (Officer's Bonus) Officer's Bonus Payable 31 Income Tax Expense Income Taxes Payable 327,102.80 1,401,869.16 327,102.80 1,401,869.16 NATIONAL MOTORS Partial Balance Sheet December 31, 2004 Current Liabilities Officer's bonus payable Income taxes payable $ 327,102.80 1,401,869.16 P12-8 July 1, 2004 lien date No entry Three monthly entries: July 31 - Sept 30, 2004 Property Tax Expense ($15,300 Property Taxes Payable 12) 1,275 1,275 Oct 30, 2004 Property Tax Expense* Property Taxes Payable 1,317.22 *Actual tax Less: Tax expense recorded ($1,275 x 3) Remaining tax expense Remaining months in fiscal year Tax expense per month 1,317.22 $15,680 (3,825) $11,855 $ 1,317.22 Nov 30, 2004 payment of property taxes Property Taxes Payable [(3 x $1,275) + $1,317.22] Prepaid Property Taxes Cash 5,142.22 10,537.78 12-34 15,680.00 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P12-8 (continued) (continued) Eight monthly entries: Nov 30, 2004 - June 30, 2005* Property Tax Expense Prepaid Property Taxes 1,317.22 1,317.22 *Last entry amount is $1,317.24 to correct rounding error ROSEN CORPORATION Partial Balance Sheet December 31, 2004 Current Assets Prepaid property taxes [$10,537.78 (2 x $1,317.22)] $7,903.34 P12-9 2004 Cash (or Accounts Receivable) Sales 500,000 Warranty Expense [$550,000 x (0.03 + 0.05 + 0.07)] Estimated Liability Under Warranties 75,000 Estimated Liability Under Warranties Cash (or Other Assets) 62,000 2005 Cash (or Accounts Receivable) Sales 650,000 Warranty Expense ($650,000 x 0.15) Estimated Liability Under Warranties 97,500 Estimated Liability Under Warranties Cash (or Other Assets) 82,000 2006 Cash (or Accounts Receivable) Sales 700,000 Warranty Expense ($700,000 x 0.15) Estimated Liability Under Warranties 105,000 12-35 500,000 75,000 62,000 650,000 97,500 82,000 700,000 105,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P12-9 (continued) (continued) Estimated Liability Under Warranties Cash (or Other Assets) 85,000 85,000 Estimated liabilities under warranties at December 31, 2006: $136,700 2004 2005 2006 Estimated Liabilities Under Warranty 62,000 Bal 12/31/03 88,200 82,000 2004 75,000 85,000 2005 97,500 2006 105,000 Bal 12/31/06 136,700 P12-10 Cash (or Accounts Receivable) Sales (8,000 x $920) Unearned Warranty Revenue (8,000 x $73) 7,944,000 Warranty Expense Cash (or Other Assets) 94,400 Unearned Warranty Revenue Warranty Revenue 94,400 7,360,000 584,000 94,400 94,400 P12-11 October Cash or Accounts Receivable (21,000 x $2.80) Sales 58,800 Inventory of Premium Shovel Sets (880 x $3.00) Cash 2,640 Premium Expense [(12,000 15) x $3.00] Inventory of Premium Shovel Sets 2,400 Premium Expense [{(0.70 x 21,000) - 12,000} 15] x $3.00 Estimated Premium Claims Outstanding Sales Premium Expense Income Summary 540 58,800 12-36 58,800 2,640 2,400 540 2,940 55,860 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P12-11 (continued) (continued) November Cash or Accounts Receivable (24,000 x $2.80) Sales Inventory of Premium Shovel Sets (1,083 x $3.00) Cash 67,200 3,249 Premium Expense Estimated Premium Claims Outstanding Inventory of Premium Shovel Sets [(16,005 15) x $3.00] Premium Expense {[0.70 x (21,000 + 24,000)] (12,000 + 16,005)} 15 x $3.00 Estimated Premium Claims Outstanding Sales Premium Expense Income Summary Inventory of Premium Shovel Sets (1,697 x $3.00) Cash 3,201 699 92,400 5,091 Premium Expense Estimated Premium Claims Outstanding Inventory of Premium Shovel Sets [(20,745 15) x $3.00] Premium Expense {[0.70 x (21,000 + 24,000 + 33,000)] - (12,000 + 16,005 + 20,745)} 15 x $3.00 Estimated Premium Claims Outstanding Sales Premium Expense Income Summary 699 3,360 63,840 92,400 5,091 3,450 699 4,149 1,170 92,400 12-37 3,249 2,661 540 67,200 December Cash or Accounts Receivable (33,000 x $2.80) Sales 67,200 1,170 4,620 87,780 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P12-11 (continued) YUMMY CEREAL COMPANY Partial Balance Sheets October At the End of November December Current Assets Inventory of premium shovel sets $240 $288 $1,230 Current Liabilities Estimated premium claims outstanding $540 $699 $1,170 P12-12 This loss contingency is accrued at the end of 2004 because (a) it is an existing condition, (b) a loss is probable, and (c) the loss can be reasonably estimated The loss is accrued at the most likely amount ($80,000) within the range of amounts as follows: 2004 Dec 31 Estimated Loss From Litigation Estimated Liability From Pending Lawsuit 80,000 80,000 This loss contingency is accrued at the end of 2004 because (a) it is an existing condition, (b) a loss is probable, and (c) the loss can be reasonably estimated The loss is accrued at the estimated cost of repairs ($200,000) as follows: 2004 Dec 31 Estimated Expense From Recall Repairs Estimated Liability For Recall Repairs 200,000 200,000 The potential lawsuits for injury claims are disclosed in a note to the financial statements because there is a reasonable possibility that a loss may have been incurred This loss contingency is accrued at the end of 2004 because (a) it is an existing condition, (b) a loss is probable, and (c) the loss can be reasonably estimated The loss is accrued at the minimum amount of the range ($40,000) because it is not likely that the loss will be less, as follows: 2004 Dec 31 Estimated Loss From Pollution Fine Estimated Liability For Pollution Fine 12-38 40,000 40,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P12-12 (continued) Because of conservatism, this gain contingency is not accrued but is disclosed in the notes to the financial statements P12-13 (AICPA adapted solution) Note to Instructor: This problem includes a potential appropriation of retained earnings that is not discussed until Chapter 16 However, students should be able to solve the problem without specific knowledge of this topic 2004 Dec 31 Magazine Subscriptions Collected in Advance Magazine Subscriptions Revenue To record subscriptions earned during 2004 aLiability account: Book balance at December 31, 2004 Adjusted balance ($600,000 + $900,000 + $400,000) Credit to revenue account 600,000a 600,000 $2,500,000 (1,900,000) $ 600,000 No journal entry should be made to accrue for an expense, because the absence of insurance coverage does not mean that an asset has been impaired or a liability has been incurred as of the balance sheet date Greenlaw may, however, appropriate retained earnings for self-insurance as long as actual costs or losses are not charged to the appropriation of retained earnings and no part of appropriation is transferred to income The loss contingency may also be disclosed in the notes to the financial statements Appropriation of retained earnings and/or disclosure in the notes to the financial statements are not required Estimated Loss From Pending Lawsuit Estimated Liability From Pending Lawsuit To record estimated minimum damages on breach-of-contract litigation No journal entry should be made for this loss contingency, because it is not probable that an asset has been impaired or a liability has been incurred and the loss cannot be reasonably estimated as of the balance sheet date The loss contingency should be disclosed in the notes to financial statements 12-39 100,000 100,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P12-14 The $3,000,000 commercial paper liquidated prior to the refinancing will be classified as a current liability on Palmer's balance sheet at December 31, 2004 FASB Interpretation No states that even if funds used to retire short-term debt are replaced, the liability must nevertheless be recorded as a current liability The remaining $4,000,000 will be classified as long-term debt, since Palmer issued the long-term bonds after the balance sheet date but before the date of issuance, thereby demonstrating the ability to refinance P12-15 ATWOOD TABLE COMPANY Partial Balance Sheet December 31, 2004 Current Liabilities Notes payable $2,000,000 Long-Term Liabilities Notes payable (expected to be refinanced in 2005) $6,000,000 P12-16 2004 Jan Machinery Discount on Notes Payable Notes Payable 72,597.90* 7,402.10 80,000.00 * P $20,000 (Pon 4, i 4% ) Mar 31 Interest Expense (see schedule) Notes Payable Discount on Notes Payable Cash 12-40 2,903.92 20,000.00 2,903.92 20,000.00 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P12-16 (continued) (continued) Jun Sep Dec 30 30 31 Interest Expense (see schedule) Notes Payable Discount on Notes Payable Cash 2,220.07 20,000.00 Interest Expense (see schedule) Notes Payable Discount on Notes Payable Cash 1,508.88 20,000.00 Interest Expense (see schedule) Notes Payable Discount on Notes Payable Cash 769.23 20,000.00 Date 2004 Jan Mar 31 Jun 30 Sep 31 Dec 31 Payment Schedule of Interest Expense and Obligation Reduction Reduction of 4% Interest Expense Obligation $20,000 20,000 20,000 20,000 $80,000 $2,903.92 2,220.07 1,508.88 769.23 $7,402.10 $17,096.08 17,779.93 18,491.12 19,230.77 $72,597.90 2,220.07 20,000.00 1,508.88 20,000.00 769.23 20,000.00 Net Obligation $72,597.90 55,501.82 37,721.89 19,230.77 -0- NORTHERN MANUFACTURING COMPANY Partial Balance Sheet June 30, 2004 Current Liabilities Notes payable Less: Discount on notes payable $40,000.00 (2,278.11) $37,721.89 P12-17 2004 Jan Purchases [$30,000 ($30,000 x 0.02)] Accounts Payable 29,400 12-41 29,400 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P12-17 (continued) Jan Mar May Nov Dec 26 31 Accounts Payable Purchases Discounts Lost Cash 29,400 600 Vans Cash Notes Payable 19,950 Cash [$50,000 - ($50,000 x 0.12)] Discount on Notes Payable Notes Payable 44,000 6,000 Cash Refundable Deposits Received on Furniture Rentals Vans Cash Use Taxes Payable 19,170 31 Income Tax Expense Income Taxes Payable 31 Interest Expense ($10,000 x 0.12 x 9/12) Interest Payable 31 12) 3,000 150,000 900 Interest Expense ($50,000 x 0.12 x 8/12) Discount on Notes Payable 12-42 50,000 500 15,975 Property Tax Expense ($36,000 Property Taxes Payable 9,950 10,000 500 Accounts Receivable Sales Sales Taxes Payable 31 30,000 4,000 15,000 975 18,000 1,170 3,000 150,000 900 4,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P12-18 2004 Nov Cash ($40,000 - $1,200) Discount on Notes Payable ($40,000 x 12% x 3/12) Notes Payable 38,800 1,200 Cash Sales (100 x $5,000) 500,000 Warranty Expense (100 x $125) Estimated Liability under Warranties 12 Cash Sales (100 x $300) 14 Inventory of Premium Disks Cash (80 x $5) 20 Estimated Liability under Warranties Cash 30 Sales Salaries Expense: Compensated Absences (_ x $7,200) Office Salaries Expense: Compensated Absences (1/3 x $7,200) Liability for Employee's Compensation for Future Absences (1/12 x $86,400) 30 30 40,000 500,000 12,500 12,500 30,000 400 2,900 30,000 400 2,900 4,800 2,400 7,200 Sales Salaries Expense Office Salaries Expense F.I.C.A Taxes Payable (8% x $144,000) Employee Federal Income Taxes Withholding Payable (15% x $144,000) Cash 96,000 48,000 Payroll Tax Expense F.I.C.A Taxes Payable (8% x $144,000) 11,520 11,520 21,600 110,880 11,520 12-43 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P12-18 (continued) Dec 14 Premium Expense (20 x $5) Inventory of Premium Disks 29 Loss from Accident Estimated Liability Due to Litigation 31 31 100 100 1,500 1,500 Sales Salaries Expense: Compensated Absences Office Salaries Expense: Compensated Absences Liability for Employee's Compensation for Future Absences Sales Salaries Expense ($97,200 - $3,400) Office Salaries Expense ($48,600 - $1,600) Liability for Employee's Compensation for Future Absences F.I.C.A Taxes Payable (8% x $145,800) Employee Federal Income Taxes Withholding Payable (15% x $145,800) Cash 4,800 2,400 7,200 93,800 47,000 5,000 11,664 21,870 112,266 31 Payroll Tax Expense F.I.C.A Taxes Payable 11,664 31 Salaries Expense (Officer's Bonus) Officer's Bonus Payable 40,412 aB = 0.10 ($560,000 - T) T = 0.30 ($560,000 - B) B = 0.10 [$560,000 - 0.30 ($560,000 - B)] B = 0.10 [$560,000 - $168,000 + 0.30 B] B = $56,000 - $16,800 + 0.03 B B - 0.03 B = $39,200 0.97 B = $39,200 B = $39,200 0.97 B = $40,412 12-44 11,664 40,412a To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P12-18 (continued) Dec 31 Income Tax Expense Income Taxes Payable 155,876 155,876a aT = 0.30 ($560,000 - $40,412) T = $155,876 31 Premium Expense Estimated Premium Claims Outstanding aTotal software packages sold 300a 100 Total proofs estimated for redemption (80% x 100) Less: Proofs redeemed 80 (20) Estimated number of proofs for future redemption 60 Premium expense (60 x $5) 31 300 $300 Interest Expense Discount on Notes Payable (2/3 x $1,200) 12-45 800 800 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 12-46 ... slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 12-28 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com SOLUTIONS TO... Obligations" section of this chapter for general reference Generally Accepted Accounting Principles The generally accepted accounting principles relating to advertising costs are contained in AICPA... more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ANSWERS TO MULTIPLE CHOICE b d b d a b 12-16 d c 10 d a To download more slides, ebook, solutions and test