th proposed a penalty assessment. Now's fiscal year ends on 16, and its financial statements are published in March 2017. Management feels an assessment is reasonably possible, and if an assessment is made an unfavorable settlement of $13 million is probable. What, if any, action should Now take for its financial statements? assessment L013-5, LO13-6 Exercises Mc Graw Hill ducate connect TACCOUNTING An alternate exercise and problem set is available in the Connect library. E13-1 Bank loan; accrued interest LO13-2 On November 1, 2016, 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. Required: 1. Prepare the journal entry for the issuance of the note by Quantum Technology. 2. Prepare the appropriate adjusting entry for the note by Quantum on December 31, 2016. 3. Prepare the journal entry for the payment of the note at maturity. E 13-24 On July 1, 2016, Ross-Livermore Industries issued nine-month notes in the amount of $400 million. Interest is payable at maturity. Determining accrued interest in various situations L013-2 Required: Determine the amount of interest expense that should be recorded in a year-end adjusting entry under each of the following independent assumptions: Interest Rate Fiscal Year-End BIO 1. 2. 3. 12% 10% 9% 6% December 31 September 30 October 31 January 31 4. 766 SECTION 3 Financial Instruments and Liabilities The following selected transactions relate to liabilities of United Insulation Corporation. United's fiscal year ends 2 E 13-3 Short-term notes LO13-2 on December 31. 3. Required: Prepare the appropriate journal entries through the maturity of each liability. 2017 31 E 13.4 Paid future absences LO13-3 2016 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 million at the bank's prime rate. Feb. 1 Arranged a three-month bank loan of $5 million 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. Dec. 1 Supported by the credit line, issued $10 million of commercial paper on a nine-month note. Interest was discounted at issuance at a 9% discount rate. Recorded any necessary adjusting entry(s). 2017 Sept. 1 Paid the commercial paper at maturity. JWS Transport Company's employees earn vacation time at the rate of 1 hour per 40-hour work period. The vaca- tion pay vests immediately (that is, an employee is entitled to the pay even if employment terminates). During 2016, total wages paid to employees equaled $404,000, including $4,000 for vacations actually taken in 2016 but not including vacations related to 2016 that will be taken in 2017. All vacations earned before 2016 were taken before January 1, 2016. No accrual entries have been made for the vacations. No overtime premium and no bonuses were paid during the period. Required: Prepare the appropriate adjusting entry for vacations earned but not taken in 2016. On January 1, 2016, Poplar Fabricators Corporation agreed to grant its employees two weeks' vacation each year, with the stipulation that vacations earned each year can be taken the following year. For the year ended December 31, 2016, Poplar Fabricators' employees each earned an average of $900 per week. Seven hundred vacation weeks earned in 2016 were not taken during 2016. FASB codificat E 13-5 Paid future absences 1.013-3 10134,20 LO13-3 Required: 1. Prepare the appropriate adjusting entry for vacations earned but not taken in 2016. 2. Suppose that, by the time vacations actually are taken in 2017, wage rates for employees have risen by an average of 5 percent from their 2016 level. Also, assume wages earned in 2017 (including vacations earned and taken in 2017) were $31 million. Prepare a journal entry that summarizes 2017 wages and the payment for 2016 vacations taken in 2017. Current E 13-6 Customer advances; sales taxes LO13-3 Bavarian Bar and Grill opened for business in November 2016. During its first two months of operation, the restaurant sold gift certificates 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 certificates are redeemed within one year. Certificates totaling $1,300 were presented for redemption during 2016 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 certificates) are purchased. Sales taxes will be remitted in January. CONCUTE Toeb Lupe PLC Required: 1. Prepare the appropriate journal entries (in summary form) for the gift certificates sold during 2016 (keeping in mind that, in actuality, each sale of a gift certificate or a meal would be recorded individually). 2. Determine the liability for gift certificates to be reported on the December 31, 2016, balance sheet. 3. What is the appropriate classification (current or noncurrent) of the liabilities at December 31, 2016? Why? E 13-7 Customer deposits LO13-3 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 2016, 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, 2016, represented deposits of $530,000. In 2016, $790,000 was refunded and deposits forfeited were $35,000. Required: 1. Prepare the appropriate journal entries for the deposits received and returned during 2016. 2. Determine the liability for refundable deposits to be reported on the December 31, 2016, balance sheet. E Various ransactions involving advance collections 2013-3 Required: Prepare the appropriate journal entries for these transactions. 1. On December 15, received $7,500 from Bradley Farms toward the purchase of a $98,000 tractor to be deliv- ered on January 6, 2017. 2. During December, received $25,500 of refundable deposits relating to containers used to transport equipment parts. 3. During December, 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.) Circuit Town commenced a gift card program in January 2016 and sold $10,000 of gift cards in January, $15,000 in February, and $16,000 in March of 2016 before discontinuing further gift card sales. During 2016, gift card redemptions were $6,000 for the January gift cards sold, $4,500 for the February cards, and $4,000 for the March cards. CircuitTown considers gift cards to be "broken” (not redeemable) 10 months after sale. E 13-9 Gift Cards L013-3 Required: 1. How much revenue will Circuit Town recognize with respect to January gift card sales during 2016? 2. Prepare journal entries to record the sale of January gift cards, redemption of gift cards (ignore sales tax), and breakage (expiration) of gift cards. 3. How much revenue will CircuitTown recognize with respect to March gift card sales during 2016? 4. What liability for deferred revenue associated with gift card sales would Circuit Town show as of December 31, 2016? E 13-10 Access the FASB Accounting Standards Codification at the FASB website (asc.fasb.org) FASB codification research • L013-3, L013-4, LO13-5 Required: Determine the specific citation for accounting for each of the following items: 1. If it is only reasonably possible that a contingent loss will occur, the contingent loss should be disclosed. 2. Criteria allowing short-term liabilities expected to be refinanced to be classified as long-term liabilities. 3. Accounting for the revenue from separately priced extended warranty contracts. 4. The criteria to determine if an employer must accrue a liability for vacation pay. CODE E 13-11 Current- noncurrent classification of debt; Sprint Corporation • L013-1, LO13-4 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 million 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. Required: How did Sprint report the debt in its balance sheet? Why? Consider the information presented in E13-11. E13-12 Current- noncurrent classification of debt; Sprint Corporation • L013-1, Required: 1. How would Sprint report the debt in its balance sheet if it reported under IFRS? Why? 2. Would your answer to requirement 1 change if Sprint obtained its long-term credit facility after the balance sheet date? Why? L013-4, L013-7 IFRS Financial Instruments and Liabilities 768 SECTION 3 At December 31, 2016, Newman Engineering's liabilities include the following: but bondholders have the option of calling (demanding payment on) the bonds on May 31, 2017. However, 1. $10 million of 9% bonds were issued for $10 million on May 31, 1997. The bonds mature on May 31, 2027, An E 13-13 Current- noncurrent classification of debt LO13-1, LO13-4 en 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, 2020. A debt covenant requires Newman to maintain assets at least equal to 175% of its current liabilities . On December 21, 2016. Newman is in violation of this covenant. Newman obtained a waiver from National City Bank until June 2017, having convinced the bank that the company's normal 2 to 1 ratio of current assets to current liabilities will be reestablished during the 3. $7 million of 11% bonds were issued for $7 million on August 1, 1987. The bonds mature on July 31, 2017. Sufficient cash is expected to be available to retire the bonds at maturity. ha Fo first half of 2017. an 1. 2 Required: What portion of the debt can be excluded from classification as a current liability (that is, reported as a noncurrent liability)? Explain. Access the FASB Accounting Standards Codification at the FASB website (asc.fasb.org) E 13-14 FASB codification research LO13-5 Required: 1. Obtain the relevant authoritative literature on recognition of contingent losses. What is the specific citation that describes the guidelines for determining when an expense and liability should be accrued for a contingent loss? 2. List the guidelines. CODE Cupola Awning Corporation introduced a new line of commercial awnings in 2016 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: E 13-15 Warranties LO13-5, LO13-6 J101344 Sales Actual Warranty Expenditures $5,000,000 $37,500 Required: 1. Does this situation represent a loss contingency? Why or why not? How should Cupola account for it? 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 2016. 3. What amount should Cupola report as a liability at December 31, 2016? E 13-16 Extended warranties LO13-5, LO13-6 Carnes Electronics sells consumer electronics that carry a 90-day manufacturer's warranty. At the time of purchase , customers are offered the opportunity to also buy a two-year extended warranty for an additional charge. During the year, Carnes received $412,000 for these extended warranties (approximately evenly throughout the year). Required: 1. Does this situation represent a loss contingency? Why or why not? How should it be accounted for? 2. Prepare journal entries that summarize sales of the extended warranties (assume all credit sales) and any aspects of the warranty that should be recorded during the year. E 13-17 Contingency; product recall • LO13-5, LO13-6 Sound Audio manufactures and sells audio equipment for automobiles. Engineers notified management in December 2016 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. Required: 1. Should this loss contingency be accrued, only disclosed, or neither? Explain. 2. What loss, if any, should Sound Audio report in its 2016 income statement? 3. What liability, if any, should Sound Audio report in its 2016 balance sheet? 4. Prepare any journal entry needed. E 13-18 Impairment of accounts receivable LO13-5, LO13-6 The Manda Panda Company uses the allowance method to account for bad debts. At the beginning of 2016, the allowance account had a credit balance of $75,000. Credit sales for 2016 totaled $2,400,000 and the year-end accounts receivable balance was $490,000. During this year, $73,000 in receivables were determined to be uncollectible. Manda Panda anticipates that 3% of all credit sales will ultimately become uncollectible. The fiscal year ends on December 31. value) Manda Panda should report in its 2016 balance sheet? € 13-19 Uhasserted Assessment At April 1, 2017, 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 December 31, 2016. The company's financial statements are issued in April 2017. 2013-6 Required: For each of the following scenarios, determine the appropriate way to report the situation. Explain your reasoning and prepare any necessary journal entry. 1. Management feels an assessment is reasonably possible, and if an assessment is made an unfavorable settle- ment of $13 million is reasonably possible. 2. Management feels an assessment is reasonably possible, and if an assessment is made an unfavorable settle- ment of $13 million is probable. 3. Management feels an assessment is probable, and if an assessment is made an unfavorable settlement of $13 million is reasonably possible. 4. Management feels an assessment is probable, and if an assessment is made an unfavorable settlement of $13 million is probable. E 13-20 Various transactions The following selected transactions relate to contingencies of Classical Tool Makers, Inc., which began operations in July 2016. Classical's fiscal year ends on December 31. Financial statements are issued in April 2017. involving contingencies L013-5, LO13-6 Required: 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. 1. 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 million (all credit) for 2016. Actual warranty expenditures were $30,800 and were recorded as warranty expense when incurred. 2. Although no customer accounts have been shown to be uncollectible, Classical estimates that 2% of credit sales will eventually prove uncollectible. 3. In December 2016, the state of Tennessee filed suit against Classical, seeking penalties for violations of clean air laws. On January 23, 2017, Classical reached a settlement with state authorities to pay $1.5 million in penalties. 4. Classical is the plaintiff in a $4 million lawsuit filed against a supplier. The suit is in final appeal and attor- neys advise that it is virtually certain that Classical will win the case and be awarded $2.5 million. 5. In November 2016, Classical became aware of a design flaw in an industrial saw that poses a potential electri- cal hazard. A product recall appears unavoidable. Such an action would likely cost the company $500,000. 6. 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. Ten thousand of the jigsaws were sold in 2016. Total rebates to customers in 2016 were $105,000 and were recorded as promotional expense when paid. E13-21 Various transactions 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 2017. Erismus prepares its financial statements according to U.S. GAAP. involving contingencies L013-5, L013-6 Required: Indicate the amount of asset or liability that Erismus would record, and explain your answer. 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. 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. 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. 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. 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.
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