Chapter 13 Completed Notes

Chapter 13 Completed Notes - ‘—l’:==* —L CHAPTER...

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Unformatted text preview: ‘—l’:==* —L CHAPTER is: CURRENT LIABILITIES AND CONTIGiLCIES l OPabiqPrTioNS ME Nt'ivtw )1 1mm. 1 BF pewtean M16 1. Describe the nature. type. and valuation of current liabilities. Current liabilities are obligations whose liquidation a company reasonably expects to require the use of current assets or the creation of other current liabilities. Theoretically. liabilities should be measured b the present value of the future outlay of cash regulreEi to ligulaate them. In practice. companies usua y record and report current liabilities at their full maturity value. There are several types of current liabilities. The following list details the most common types: (1) accounts payable. (2) notes payable. (3) current maturities of long-term debts. (4) dividends payable. (5J'returnabie deposits. (6) unearned revenue, (7) taxes payable, and (8) employee-related liabilities. Tewmtmk‘i WWNT LifiiltLith/S Jt-iowup me; Sui)de (it Pu or ANOuNT we VJ EMT StNUE we 4 l‘iCPrN-rYV inomp a -1. Snowst- AT AMwmr'cue Purpose: (LO. 1) This‘exercise tests your ability to distinguish between current and noncurrent (long-term) liabilities. [on \fmtt. CNN) Instructions indicate how each of the foiloWing items would be reported on a balance sheet being prepared at December 31. 2007. Obligation to supplier for merchandise purchased on credit. (Terms 2/10. n/30) Note payabie to bank maturing 90 days after balance sheet date. Bonds payable due January 1. 2010. Utilities payable. interest payable on long-term bonds payable. income taxes payable. Portion of lessee's lease obligations due in years 2009 through 2013. Revenue received in advance. to be earned over the next six months. Salaries payable. 10. Rent payable. 11. Short-term notes payable. 12. Pension obligations maturing in ten years. 13. instaliment loan payment due three months after balance sheet date. 14. installment loan payments due after one year. 15. Portion of iessee's lease obligations due within a year after the December 31. 2007 aiance sheet date. 16. Bank overdraft. . 17. Accrued officer bonus. 18. Coupon offers outstanding. 19. Cash dividends declared but not paid. 20. Deferred rent revenue. weflemawwe 21. Stock dividends payable. 22. Bonds payable due June 1. 2008 _ 23. Bonds payable due July 1. 2008 for which a sinking fund will be used to pay off the debt. The sinking fund is classified as a long-term investment. 24. Discount to the bonds payable in item 3 above. 25. Current maturities of long—term debt. 26. Accrued interest on notes payable. _ 27. Customer deposits. 28. Sales taxes payable. 29. FJ.C..A. withholdings. 30. Contingent liability (reasonable possibility of loss). 31. _ Contingent liability (probable and estimable). 32. Obligation for warranties. 33. Uneamed Warranty revenue. -. 34. Gift certificates outstanding. 35. Loan from stockholder. “Mount Q 0N CPA DAN/‘1 -—- A-N) mount M LONG “ml”! 2. Expiain me classification issues of short-t debt exected to be refinanced. A short-tenn I o la ion 5 ex get from current Iiailiiie f oih o the ollowin conditions are met: 1 e coman mus 1m to refinance the obliation on a long-term basis, and (2) It rnut demonstrate o consummate the refinancln. 2: WHY my} - co MAN use ’To'luow Ar :UMM-ry Mum- / T lassmjo‘r limit: m f In acco ance with SPAS o. 6. an enterpriseis allowad to exciu rt-terrn o rgation from curr tliebilities only it be of the following conditions are met: kJ‘HiDH U Ha Kg “SKY? 1. it must inten - to refinance the obligation on a iong-tenn basis. and 2. It must demon trate an ability to consummate the refinancing. CESH intention to refinance o a ton. - n basis-m ._: the ente rise intends to refinance the short- tenn obliation so that the use - ii. orkin caital ill not be reuired during the ensuing iscal year or operating cycleI if longs. The a to consummate e refinancing must e emonstrated by: (a) ctuali refinancin the short-term obli ation b issuance of a long-term q bliation or eui securities after the date of the Balance sheet But Before It Is issued'I or Snub"! “IS!- bt CASH Enterin into a financin areerne that clearl ennits the ante rise to refinance the debt on a Ion—term b with terms that are readil determinable. if an actual refinancin occurs the ortion oi 'atlon to be excluded from current liabilities ma not exceed the moose from the new ob’ation or cut securities issued that are to be used to retire t erm obliatlon. When a financing agreement 3 relied uon to demonstrate abili a short-term obliation on a Ion-term basis the amount of short-tenn debt the uded from current liabilities cannot exceed the amount available for refinanci .3 cement. «1,9 W i wit tum." 1‘ Cit-SH I t CIR-'1 : Purpose: (LO. 2) This exercise will provide you with two examples of the proper treatment of short-ten'n debt expected to be refinanced. Situation 1 . On December 31, 2006, Mayor Frederick Specialty Foods Company had $1,000,000 of short- terrn debt in the form of notes payable due February 4. 2007. On Janua 22 2007 the com an issued 20 000 shares of its common stock for $40 er share, receiving $850,000 proceeds atter brokera e fees and other costs of issuance. 5n igefirual'y 3. 2557. ifia ' roceeas ON” 4’ from the stock sale. suppiemented by an additional $200,000 casfi. are usfi to Ii uiaaie ifie Q m ,W‘V $1,000,000 debt. fire December 31I 2006 balance sheet is issued on February 2'6, 2007. cm“ W” 5mm" 2 . Mow u: «use r M11 Issue mm a Included in Hubbard Corporation's liability account balances on December 31, 2006 were the following: 14% note payable issued October 1, 2006, maturing September 30, 2007 ' $500,000 16% note payable lssued April 1, 2003. payable in six annual - installments of $200,000 beginning April 1 . 2004 600,000 n a d Mums sneer 3am: Mute Wm: 3 Hubbard's December 31I 2006 financial statements were issued on March 31, 2007. _0_ . Janua 13 2007 the entire $600 000 balance of the 16% note was refinanced B issuance of Ion -term obli ation a able in a lum sum In addition on March 8 2007 HubEar consummated a noncanceiable a reement with the lender to refinance the 14%, $500,000 note on a lon -terrn basis with readil determinable terms that Have not at Een lm Iementfi. Both parties are financially capable of honoring the agreement. and there have been no violaiions of the agreement’s provisions. Instructions _ Situation 1: Show how the $1,000,000 of short-ten'n debt should be presented on the December 31, 2006 balance sheet, including note disclosure. Situation 2: Explain how the liabilities should be classified on the December 31, 2006 balance sheet. How much should be classified as a current liability? ism—l 616T twowpt M Low-Tam MU (to. was NI m’amg (mmnww) 3W4Mi¢ \‘aLoN SBILMIWF‘I Him-WNW“ cum/“1% 3141ng Mick] '"sauL m W'n mng 1.33145 SON—MW Winn $001 ‘VOMN : I NOUWJIS. , .' fiw'a " (No wPosn’ Lemme» FMM Owl-WNW ? E1342 (Liability for Retumable Containers) C dlebox Company sells its products in expensive, re- usable containers. The customer is charged a defiit for each container delivered and receives a refund for each container returned within two gag after £13 year of deliveg. Candlebox accounts [or the con- tainers not returned within the time limit as being sold at the deposit amount. War-nation for 1998 is as ows: Containers held by customers at December 31. 1997. Item deliveries to: 1996 3170.000 1997 480,000 5350.000 Containers delivered In 1998 860.000 Containers ratumed tn 1998 lrom deliveries In: 1996 $115,000 ~' 1997 280.000 1998 314.000 709.000 Instructions (3) Prepare all journal entries required for Candlebox Company during 1998 for the returnable containers. lb) Compute the total amount Candlebox should report as a liability for returnable containers at De- ) 0'9 e . (c) Should the liability computed in (b) above be! reported as current or long-term? (AICPA adapted) gm: " _ W“ W” 1m +- WMdlmet-T Fen MNTHNEM Gm xx uLMMuN Ho. Ls'rwwm unnuuw xx 0v writer 1.: Tue Mammua lint-wee m “Amman, Hm. LEme commnns" «JAN 1, ms? 5% 650,0“0'0 (CV) (Ln-0'33 ’w WWj anwgnfi‘d mks, 01 and Lan—w’r m‘js ‘- O-M'SH - arm‘th ‘ WM L‘MMZ n Hm ‘3be M 26106 w LMBN‘L); mum 1m 1mm awn, a»; N'HJIM ¢3Numml LON MNI‘VLNO’J 100:! but?) *2 m’bOL HY‘V’J am'boz. an; “40:: an’dm 28ka M svawwyNoa (fiNVhyyv NH knfifiq (11, N0, Anya—v0») m’oaammumm aw-vmmfl ‘dod hummer): W’OM Mm 2' 8%) Ni {31:1th namuwoo 1+3 Max:251 swim/b ummt, m. ()de HMhGN‘) LON N—ml‘ v NH-LUM Wfi‘)‘ IA Q3“;me w 0.: «mam JNO’J aw—vmrmm Ned knmmxf Murmur LM'GIM'T‘! Purpose: (LO. 1 This exercise will provide an example of the proper a unting for an obligation to an agency of the state govemment—unremitted sales taxes. During the month of September. Chelsea's Boutique had cash sles of §702f000 and credit 0 11 000 both of which include the 6% sales tax that must a remitte tot e state b Qctober 15. Sales taxes on September sales were lumped t the as as price an reco e as a credit to the Sales Revenue account. ' fowl-H ‘- k Instructions (a) Prepare the adjusting entry that should be recorded to fairly present the financial statements at September 30. (b) Prepare the entry to record the remittance of the sales taXes on October 5 if a 2% discount is allowed for payments received by the State Revenue Department by October 10. 10140-91) Mo 6ft 1. o-ru Ame; lUENENth imam T . How Muflrt Mum—TH it IN THEM}? We“ “was Tu We; +mm< let) 6 WC. ? [mars—o O a l,n3,m x l. ' 1% . “hm rNoLKJ'S‘TWO m~mwr an 9M?“ om’l o’wm (on—0'59 xab-o) mm man’s? wmd saw; rm; {5) m'z‘) WMJ yaw; vmv 0.0.0 ’eu amNstql rams uh wermaem w I; A Mmeufxrrue'nou («momma ' ‘kNWLTMNT‘I THA'T MW Lg” ,./‘° A- w“ 0“ hfm'm Fun“. 4. 5. and lo mw- gig 5'4. 19 , Identify the criteria used to account for and disclose . — ' me a reality. A company should accrue an estimated loss from a contingency by charging expense and recording a liability only If both of the following 105 conditions are met: ('1) Information available prior to the issuance of the financial statements indicates that it Is probable that a liability has been incurred at the date of the tinanclal statements. and (2) the amount of the loss can be reasonably estimated. Ruins. Fok- L055. UNTIMAENLY ——> Explain the accounting for different types of loss contingencies. (1) m: The following factors must be considered in determining whether a liability should be recorded with respect to pending or threatened litigation and actual or possible claims and assessments: (a) the time period in which the underlying cause for action occurred: (b) the probability. of an unfavorable outcome; and. (c) the ability to make a reasonable estimate of the amount of loss. (2) flaflgties; If it is probable that customers will make claims under warranties relating to goods or services that have been sold and a reasonable estimate of the costs involved can be made. the accrual method must be used. Warranty costs under the accnial basis are charged to operating expense in the year of sale. (3) Sales promotion; Premiums. coupon otters. and rebates are made to stimulate sal. and their costs should be charged to expense in the period of the sale that benefits from the promotion (premium) plan. (4) Asset retirement obligations: A company must recognize asset retirement obligations when it as an e 5 ng age o [93 on related to the retirement of a long-lived asset and it can reasonably estimate the amount. W Hun-41.0w { noun (a) awme; W Waumowaw 3.1.0wa I mwawu‘n him W WNOW}! LON 4" aWMd W xx Amwvn 1n: 33M”)? T aW’kuv; MAN: WW3 mwwown + WWW (v a: SI r501 avu.4l 5| “'0’! awn/1H M Iowa'qu non flea 34W tut-5': Purpose: (LO. 1. 4, 5) This exercise will enable you to practice analyzing situations to determine whether a liability should be reported. and if so, at what amount. Clare Avery Inc., a publishing company, is preparing its December 31, 2007 financial statements and must determine the proper accounting treatment for each of the following situations: 1. Avery sells subscriptions to several magazines for a two- or three-year period. Cash receipts from subscribers are credited to Unearned Magazine Subscriptions Revenue. This account had a balance of $5,300,000 at December 31. 2007, before adjustment. An analysis of outstanding subscriptions at December 31. 2007 shows that they expire as follows: ‘ $ 000.000 900.000 1 200,000 During 2008: During 2009: During 2010: A suit for breach of contract seeking damages of $1,000,000 was filed by an author against Avery on June 1. 2007. The company's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the court's award to the plaintiff is in the range between $200,000 and $800,000. The company's legal counsel believes the best estimate of potential damages is $350,000. On January 2. 2007, Avary discontinued collision, fire. and theft coverage on its delivery vehicles and became self-insured for these risks. Actual losses of $40,000 during 2007 were charged to Delivery Expense. The 2006 premium for the discontinued coverage amounted to $75,000, and the controller wants to setup a. reserve for self-insurance by a debit to Delivery Expense of $35,000 and a credit to Liability for Self-insurance of $35,000. . During December 2007, a competitor company filed suit against Avery for copyright infringement claiming $600,000 in damages. In the opinion of management and company counsel, it is reasonably possible that damages will be awarded to the~plaintiff. The best estimate of potential damages is $175,000. ' Instructions For each of the situations above, prepare the Journal entry that should be recorded as of December 31, 2007, or explain why an entry should not be recorded. Show supporting computations in good form. N4 ‘. PMMNMS -. kaMPw or. Less 'OOMT'lNHWb‘f Purpose: (L0. 5) This exercise will provide an example of accounting for premium claims outstanding. Shock Company include; I coupon in each box of_cerea| that it packs and 10 coupons are redeemable for a premiur.. (a toy). In 2007. Shuck Company purchased 9.000 premiums at 90 cents each and sold 100,000 boxes of cereal at $2.00 per box: 40.000 coupons were presented for redemption In 2007. It is estimated that 60% of the coupons will eventually be presented for redemption. This is the first year for this premium offering. instructions _ Prepare all the entries that would be made relative to sales of cereal and to the premium plan in 2007. 00-00) (Lo 5. PIS-9 [Premium Entries and Financial Statement Presentation) Roberto Hernandez Candy Com- 5) parry offers a CD single as a premium for every five candy bar wrappers presented by customers together with $2.00. The candy bars are sold by the company to distributors for 30 cents each. The purchase price of each CD to the company is $1.80; in addition it costs 30 cents to mail each CD. The results of the pre mium plan for the years 2007 and 2008 are as follows. (All purchases and sales are for cash.) 2007 2000 CD: purchased 250.000 330.000 Candy bars sold 2.005.400 2.743.600 Wrappers redeemed - 1.200.000 1.500.000 2007 wrappers expected to be redeemed In 2008 290.000 2008 wrappers expected to be redeemed In 2009 350.000 Instructions (0) Prepare the journal entries that should be made in 2007 and 2008 to record the transactions re- lated to the premium plan of the Roberto Hernandez Candy Company. (b) Indicate the account names, amounts, and classifications of the items related to the premium plan that would appear on the balance sheet and the income statement at the end of 2007 and 2008. chr PROBLEM 13-9 (a) m Inventory of Premium CDs ................................................. .. 450,000 Cash ................................................................................ .. (To record the purchase of 250,000 CDs at $1.80 each) Cash ........................................................................................... .. 868,620 Sales ................................................................................ .. (To record the sale of 2,895,400 candy bars at 30 cents each) Cash [$480,000 — (240,000 X .30)] ..................................... .. 408,000 Premium Expense ................................................................. .. 24,000 Inventory of Premium CDs ...................................... .. [To record the redemption of 1,200,000 wrappers, the receipt of $480,000 (1 ,200,000 -:- 5) X $2.00, and the mailing of 240,000 CDs] Computation of premium expense: 240,000 CDs @ $1.80 each = ................................ .. $432,000 Postage—240,000 X $.30 = ................................... .. 72,000 $504,000 Less: Cash received— 240,000 X $2.00 .......................................... .. 480,000 Premium expense for CDs issued .................... .. § 24,000 Premium Expense ................................................................. .. 5,800* Estimated Liability for Premiums .......................... .. (To record the estimated liability for premium claims outstanding at 12/31/07) *(290,000 + 5) X ($1.80 + $.30 — $2.00) = $5,800 1 3-45 450,000 868,620 432,000 5,800 PROBLEM 13-9 (Continued) 2008 Inventory of Premium CDs ................................................. .. 594,000 Cash ................................................................................ .. 594,000 (To record the purchase of 330,000 CDs at $1.80 each) Cash .......................................................................................... .. 823,080 Sales ............................................................................... .. 823,080 (To record the sale of 2,743,600 candy bars at 30 cents each) Cash ($600,000 — $90,000) .................................................. .. 510,000 Estimated Liability for Premiums .................................... .. 5,800 Premium Expense ................................................................. .. 24,200 Inventory of Premium CDs ...................................... .. 540,000 (To record the redemption of 1,500,000 wrappers, the receipt of $600,000 [(1,500,000 + 5) X $2.00], and the mailing of 300,000 CDs.) Computation of premium expense: 300,000 CDs @ $1.80 = .......................................... .. $540,000 Postage—300,000 @ .30 = ................................. .. 90,000 630,000 Less: Cash received— (1,500,000 -:- 5) X $2.00 ........................................... .. 600,000 Premium expense for CDs issued ........................ .. 30,000 Less: Outstanding claims at 12/31/07 charged to 2007 but redeemed in 2008 ............. .. 5,800 Premium expense chargeable to 2008 ................ .. § 24,200 Premium Expense ................................................................. .. $ 7,000* Estimated Liability for Premiums ......................... .. 7,000 *(350,000 + 5) X ($1 .80 + $.30 — $2.00) = $7,000 1 3-46 PROBLEM 13-9 (Continued) (b) Amount Account 2007 2008 Classification Inventory of Premium CDs $18,000* $72,000“ Current asset Estimated Liability for Premiums 5,800 7,000 Current liability Premium Expense 29,800*** 31 ,200**** Selling expense *$1.80 (250,000 - 240,000) “$1.80 (10,000 + 330,000 - 300,000) ***$24,000 + $5,800 ****$24,200 + $7,000 1 3-47 Ms K?!) xx Mr? MW m~m~m AL um W 'Jx’; waM r) KT qr kmmam 4405 9W ‘39 r) Alw'vm mun Si MW Mam m—vmuw WWde UNVWUM saws MWM 95mph} WW WNW m Mum M Wde MN“ ) 1- mm LwNa WW6 my 9 (m mm ‘aww mm) 5 M W 7 {WW MW’O amw'm MIMMWW ‘ “MMHNILNB’J smq (- “Mm—HM cW-‘l : Purpose: (LO. 5) This exercise will provide an example of the journal entries involved in accounting for a warranty that is included with the sale of a product (warranty is not sold separately). Two methods are examined—the cash basis and the expense warranty method (an accrual method). Zack Corporation sells laptop computers under a two-year warranty contract that requires the corporation to replace defective parts and to provide the necessary repair labor. During 2006 the corporation sells for cash 400 computers at a unit price of $2.000. 0n the basis of past experience, the two-year warranty costs are estimated to be $90 for parts and $100 for labor per unit. (For simplicity, assume that all sales occurred on December 31. 2006. rather than evenly throughout the year.) Instructions (a) Record any necessary journal entries in 2006, applying the cash basis method. (b) Record any necessary journal entries in 2006. applying the expense warranty accrual method. (c) What liability relative to these transactionswould appear on the December 31, 2006 balance sheet and how would it be classified if the cash basis method is applied? (d) What liability relative to these transactions would appear on the December 31. 2006 balance sheet and how would it be classified if the expense warranty accrual method is applied? In 2007 the actual warranty costs to Zack Corporation were $14,800 for parts and $18,200 for labor. ' (e) Record any necessary journal entries in 2007, applying the cash basis method. (f) Record any necessary journal entries in 2007, applying the expense warranty accrual method. (9) Under what conditions is it acceptable to use the cash basis method? Explain. Owl-9'. Purpose: (LO. 6) This exercise will exemplify the journal entries involved in accounting for a warranty that is sold separately from the related product. The sales warranty accmal method is used for such situations. ' The Contessa Company sells scanners for $800 each and offers to each customer a three—year warranty contract for $90 that requires the company to perform periodic services and to replace defective parts. During 2006, the company sold 500 scanners and 400 warranty contracts for cash. It estimates the three-year warranty costs as.$30 for parts and $50 for labor and accounts for warranties on the sales warranty accrual method. Assume all sales occurred on December 31, 2006. and revenue from the sale of the warranties is to be recognized on a straight-line basis over the life of the contract. Instructions (a) Record any necessary journal entries in 2006. (b) What liability relative to these transactions would appear on the December 31. 2006 balance sheet and how would it be classified? in 2007. Terence Trent Company incurred actual costs relative to 2006 scanner warranty sales of $3,800 for parts and $6,000 for labor. - (c) Record any necessary journal entries in 2007 relative to 2006 scanner warranties. (d) What amounts relative to the 2006 scanner warranties would appear on the December ~' 31, 2007 balance sheet and how would they be classified? '3: "I cw-q: Purpose: (LO. 5) This exercise will review, the accounting recognition for an asset retirement obligation. Silverado Corp. purchased mining equipment with cash on January 1, 2007, at a cost of $3,000,000. Silverado expects to actively extract units from the mine for 5 years at which time it is legally required to perform certain steps to close the mine and remove the mining equipment. It is estimated that it will cost $500,000 to properly dismantle the equipment and close the mine at the end of its useful life. Using an interest rate of 8%, the present value of the asset retirement obligation on January 1, 2007. is $340,290. The estimated residual value of the equipment is zero. Instructions (3) Prepare the journal entries to record the acquisition of the mining equipment and the asset retirement obligation for the mine on January 1, 2007. (b) Prepare any journal entries required for the equipment and the asset retirement obligation at December 31, 2007. (c) On January 5. 2012, Silverado Corp. pays $481,000 to close the mine and remove the equipment. Prepare the journal entry for the settlement of the asset retirement obligation. ...
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Chapter 13 Completed Notes - ‘—l’:==* —L CHAPTER...

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