Exercise 4-7 Working Backward: Prepaid Insurance
On December 31, 2017, Baxter Company reported $8,000 in prepaid insurance on its balance sheet. The insurer requires Baxter to pay the annual premium of $24,000 in advance.
Required 1. How much will Baxter recognize each month in insurance expense? 2. On what date does Baxter renew its insurance policy? Explain your answer.
Prepaid Insurance
Prepayment 24,000.00$ assumed to cover one year of insurance (12 months)
12.00
Monthly Insurance Expense 2,000.00$
Prepayment 24,000.00$
December 31, 2017 Balance 8,000.00
Insurance cost consumed 16,000.00
Divided by 2,000 per month 8.00 months of accruing for insurance expense
Move back 8 months from 12/31 April 30, 2017
Expiry Date of Current Insurance April 30, 2018
Next date of renewal May 1, 2018
Revenue Recognition, BASIN WATER, INC. AND SUBSIDIARIES
1. Groundwater systems SOLD TO CUSTOMERS- percentage of completion method
comparing acutal costs incurred to total estimated costs to complete each system. (up until entire contract – maybe up to complete installation)
has been completed
2. Groundwater systems delivered to customers under various contract arrangements
Record income of periodic fees (straight-line) over life of contract
Recognize processing fee as well
DIRECT SALES
Sold to customers under fixed-price contracts.
using percentage of completion method.
Because of inherent uncertaineties in estimating costs, estimates used may change within the near term. Cumulative-catch-up-method
Sales contract deemed substantially complete when treatement system has been physically comleted and a performance test has been passed.
Provision of anticipated losses were made
Contract Revenue (3 revenue streams)
1. install and maintain- company retains ownership of the system.
2. simply treatment of installed systems – service revenue is recognized based on actual volume of water treated
3. Other services for the processing of water, replacement of resins or equipment parts and other water treatment related services
Under each of the long-term contracts, the customer is obligated to pay company FOR THE TREATMENT OF WATER- NOT FOR SPECIFIC HOURS WORKED, SUPPLIES PURCHASED OR WASTE HAULS PROVIDED.
it allows the company to recover increased operating costs , including costs for salt, resin and removal of waste.
EITF 00-21, multiple deliveriables of LTC specificall capital and volume related SC, qualify for separate accounting treatment.
3 criteria:
1. each deliverable has a standalone value to the customer
2. that there is objective and reliable evidence of fv of each deliverable
3. there are no general refund rights for the deliverables
in contracts which company owns the system, customer obligated to pay the company the fixed capital component of the system on a monthly basis
These ARRANGEMENTS ARE CLASSIFIED AS OPERATING LEASES UNDER SFAS NO. 13.
1. no transfer of title,
2. not a BPO
3. LEASE TERM IS SUBS << ECON LIFE
4. PV OF MLP < 90% OF FV OF WATER TREATMENT SYSTEM
Analysis