This transaction meets both criteria for reclassification the company plans to

This transaction meets both criteria for

This preview shows page 14 - 18 out of 24 pages.

to refinance the obligation. This transaction meets both criteria for reclassification: thecompany plans to refinance, and the company has the ability to refinance. The ability torefinance is evidenced by the post–balance sheet issuance of equity securities on a datethan the amount of the obligation that exists at the balance sheet date, a portion of theactual obligation ($40,000) must be reported in the current liabilities category.2 Show how the NationsBank note should be reported on Clinton's December 31, 2004, balancesheet.Balance sheet at December 31, 2004:Current liabilities:Note payable to NationsBank$ 40,000 Long-term liabilities:Note payable to NationsBank$560,000 No interest accrual is reported, because interest was paid at December 31, the balance sheet date. 3 What effect does the refinancing have on Clinton Enterprsies' current ratio at December 31, 2004?Support your response with calculations.Current ratio without refinancing: $2,400,000 ¸ ($1,200,000 + $600,000) = 1.33 rent liabilities category only if the company has demonstrated the intentand the abilitypriorto the due date of the existing loan. However, since the actual refinancing is less
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Current ratio with refinancing: $2,400,000 ¸ ($1,200,000 + $40,000) = 1.94 The current ratio is significantly improved as a result of meeting the criteria for refinancing.
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Exercise 12-18 DeferralsBugs Away provides pest controll services for 6,000 customers every month. Payment of the monthly fee of $40 is received from 40 percent of the customers at the time the service is rendered. Another 45 percent of customers pay annually on January 1, and the balance of customers pay during the month after the service is rendered. During the 2004-205 holiday season,Bugs Away sold gift certificates to its customers for a total of $16,000. As of the end of the fiscalperiod, $9,000 of the certificates had been redeemed.Required: 1. Determine how much should be reported as deferred revenue for Bugs Away at May 31, 2005, the end of its fiscal period. Deferred revenue: Paid annually on January 1: 6,000 × $40 × 12 months × 45% = $1,296,000 Unearned at May 31: $1,296,000 × 7/12 = $756,000 Gift certificates = $16,000 $9,000 = $7,000 Total deferred revenue = $756,000 + $7,000 = $763,000 2. How does deferred revenue differ from accrued liabilities. Deferred revenue represents a situation in which cash has been received in advance but has not been earned. Accrued liabilities result from expenses that have been incurred but not yet paid. While both are liabilities, they differ in how they will be liquidated. Deferred revenues are usually liquidated by providing goods or services. Accrued liabilities are most often liquidated by cash payment.
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Problem 12-1 Contingencies Booker Company has the following contingent situations: A. Booker has sued another company for damages of $2 miion. Booker's attorney believe it is probable that the company will win the lawsuit and be awarded $1.5 million. Booker should record the amount as income only when it is received. This is an ex- ample of a gain contingency. Gain contingencies are not reported in the same way as loss contingencies.
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