978-1259722660 Chapter 13 Solution Manual Part 6

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Problem 13–7

Requirement 1

Item (a): Because the loss is probable and can be reasonably estimated,

HW would be required to accrue a liability under both U.S. GAAP and

Item (b): Under IFRS, present values would be used, so the relevant

midpoint of the range that would be accrued as a liability would be

Item (c): This item is only probable according to IFRS’s use of the term,

Item (d): This item would be classified as long-term under U.S. GAAP,

Requirement 2

In this case, U.S. GAAP provides the lower total liabilities.

Problem 13–8

Requirement 1

By the traditional approach, Heinrich would accrue the more-likely-than-not

(more than 50%) amount, $30 million:

Requirement 2

Heinrich would record a contingent liability (and loss) of $27,619,020, calculated

as follows:

$40,000,000 x 20% = $ 8,000,000

Requirement 3

Requirement 4

The difference between $29,000,000 and the initial value of the liability of

Problem 13–8 (concluded)

Requirement 5

Interest increases the liability to $29 million at the end of 2019. Since there is

a difference between the actual costs, $31 million, and the $29 million liability,

Heinrich will record an additional loss.

Problem 13–9

Case 1

Note Only. When a contingency comes into existence after the year-end, a

liability cannot be accrued because it didn’t exist at the end of the year.

Case 2

Note Only. Since an unasserted claim or assessment is probable, the likelihood

of an unfavorable outcome and the feasibility of estimating a dollar amount

should be considered in deciding whether and how to report the possible loss.

Case 3

Accrual and Disclosure Note. When the cause of a loss contingency occurs

before the year-end, a clarifying event before financial statements are issued

Case 4

No Disclosure. Even though the cause of the contingency occurred before

Problem 13–10

Requirement 1

Portion of the notes payable not refinanced

Normally, short-term debt (payable within a year) is classified as current

liabilities. However, when such debt is to be refinanced on a long-term basis,

The $75,000 payment of the employee’s medical bills is a loss contingency

A disclosure note also is appropriate.

Requirement 2

Portion of the notes payable refinanced

Normally, short-term debt (payable within a year) is classified as current

Problem 13–10 (concluded)

Requirement 3

If the settlement agreement had occurred on March 15, 2019, instead, the

Requirement 4

If the work-site injury had occurred on January 3, 2019, instead, the

Problem 13–11

List A List B

j_ 1. Face amount x Interest rate x Time a. Informal agreement

g 2. Payable with current assets b. Secured loan

h 3. Short-term debt to be refinanced c. Refinancing prior to the

with common stock issuance of the

financial statements

Problem 13–12

Requirement 1

The requirement to classify currently maturing debt as a current liability

Requirement 2

The entire $30 million loan should be reported as a long-term liability because

that amount is payable in 2024. The current liability classification includes (a)

situations in which the creditor has the right to demand payment because an

Requirement 3

The intent of management is to refinance all $45,000,000 of the 7% notes, but

the refinancing agreement demonstrates the ability only for $40,000,000. $40

million can be reported as long term, but $5 million must be reported as a current

liability. Short-term obligations that are expected to be refinanced with long-term

Requirement 4

The lawsuit resulting from a dispute with a food caterer should not be accrued.

Problem 13–12 (continued)

Requirement 5

December 31, 2018

($ in millions)

Current Liabilities

Accounts payable and accruals $ 43

Problem 13–12 (continued)

Requirement 6

NOTE X: CALLABLE DEBT CLASSIFIED AS CURRENT

Transit has outstanding 6.5% bonds with a face amount of $90 million. The

bonds mature on July 31, 2027. Bondholders have the option of calling

(demanding payment on) the bonds on July 31, 2019, at a redemption price of

NOTE X: LOAN IN VIOLATION OF DEBT COVENANT

A $30 million 8% bank loan is payable on October 31, 2024. The bank has the

right to demand payment after any fiscal year-end in which the Company’s ratio

Problem 13–12 (concluded)

NOTE X: CURRENTLY MATURING DEBT CLASSIFIED AS LONG–TERM

The Company intends to refinance $45 million of 7% notes that mature in May

of 2019. In February 2019, the Company negotiated a line of credit with a

NOTE X: LAWSUIT

The Company is involved in a lawsuit resulting from a dispute with a food

caterer. On February 13, 2019, judgment was rendered against the Company in