13–78 Intermediate Accounting, 8/e
Communication Case 13–10
Suggested Grading Concepts and Grading Scheme:
Content (80% )
20 Identifies the situation as a change in estimate.
The liability was originally (appropriately) estimated as
$750,000.
The final settlement indicates the estimate should be revised.
40 Describes the journal entry related to the change in amounts.
The liability must be reduced (a debit).
A gain should be recorded (a credit).
The amount of the gain should be $275,000 ($750,000 –
475,000).
20 Indicates that additional disclosure is necessary.
Bonus (4) Provides detail regarding the disclosure note.
A disclosure note should describe the effect of a
change in estimate on key items.
The effect on income before extraordinary items, net income,
and related per share amounts for the current period should
be indicated.
80–84 points
Writing (20%)
5 Terminology and tone appropriate to the audience of a vice
president.
6 Organization permits ease of understanding.
Introduction that states purpose.
Paragraphs separate main points.
9 English.
Word selection.
Spelling.
Grammar.
20 points
Research Case 13–11
A liability is accrued if it is both probable that a loss will occur and the
amount can be at least reasonably estimated. If one or both of these criteria is not
met, but there is at least a reasonable possibility that the loss will occur, a
13–80 Intermediate Accounting, 8/e
Communication Case 13–12
Suggested Grading Concepts and Grading Scheme:
Content (80% )
30 Warranty for awnings (5 each; maximum of 30 for this part)
Change in estimate.
Change is effected prospectively only.
No prior financial statements are adjusted.
Will affect the adjusting entry for warranty expense
in 2016 [Warranty expense and Estimated
warranty liability (2% x $4,000,000)].
30 Clean air lawsuit (5 each; maximum of 30 for this part)
Change in estimate.
Change is effected prospectively only.
No prior financial statements are adjusted.
will require a revision of the previously recorded
liability [Loss—Litigation and Liability—Litigation
increased by $150,000 ($350,000 – 200,000)].
20 Indicates that additional disclosure is necessary for both.
Bonus (4) Provides detail regarding the disclosure note.
A disclosure note should describe the effect of a
change in estimate on key items.
The effect on income before extraordinary
items, net income, and related per-share amounts
for the current period should be indicated.
80–84 points
Writing (20%)
5 Terminology and tone appropriate to the audience of
division managers.
6 Organization permits ease of understanding.
Introduction that states purpose.
Paragraphs separate main points.
9 English
Word selection.
Spelling.
Grammar.
20 points
Real World Case 13–13
Requirement 1
In accordance with GAAP, when a contingency exists as of the end of a fiscal
year, in assessing whether a loss is probable and measurable and therefore should
be recorded in its financial statements, Morgan Stanley is required to take into
consideration all information up to and including the date of issuance of its
Requirement 2
($ in millions)
Requirement 3
If the settlement had occurred after the February 25 financial statement
13–82 Intermediate Accounting, 8/e
Ethics Case 13–14
Discussion should include these elements.
Warranty estimate
The cost of product warranties (or product guarantees) cannot be predicted with
certainty. However, to match expenses and revenues, we estimate the cost. The
Ethical Dilemma:
Who is affected?
Craig
President, controller, and other managers
Shareholders
IFRS Case 13–15
Under IFRS, the $70 million environmental contingency would be accrued
and included in Fizer’s liabilities. The associated loss would be reported in the
income statement. Accounting for contingencies is covered under IAS No. 37,
Under IFRS, Fizer’s bonds would have been reported as current liability in
Fizer’s balance sheet rather than as long-term debt. Under U.S. GAAP, liabilities
payable within the coming year are classified as long-term liabilities if refinancing
13–84 Intermediate Accounting, 8/e
Analysis Case 13–16
Requirement 1
Current ratio = Current assets
Current liabilities
The current ratio is one of the most widely used ratios. It is intended as a
measure of short-term solvency and is determined by dividing current assets by
current liabilities. Comparing assets that either are cash or will be converted to
cash in the near term, with those liabilities that must be satisfied in the near term,
Case 13–16 (concluded)
Requirement 2
Acid-test ratio = Quick assets
(or quick ratio) Current liabilities
The acid-test or quick ratio attempts to adjust for the implicit assumption of
the current ratio that all current assets are equally liquid. This ratio is similar to the
current ratio, but is based on a more conservative measure of assets available to
pay current liabilities. Specifically, the numerator, quick assets, includes only cash
13–86 Intermediate Accounting, 8/e
Analysis Case 13–17
1. The five components of current liabilities are:
($ in thousands)
2/2/2014
Current Liabilities:
Accounts payable and bank overdraft
$
255,251
$
Accrued payroll, bonus and employee benefits
160,008
Accrued occupancy expenses and deferred rents
Current maturities of capital lease obligations
Other current liabilities
230,332
$
794,345
$
2. Current assets are sufficient to cover current liabilities in both the fiscal years
ended 2/2/2014 and 2/3/2013:
Current assets 2/2/2014
$1,318,243
Current assets 2/3/2013
$1,317,136
Current ratio 2/2/2014
$1,318,243 ÷ $794,345 = 1.66
Current ratio 2/3/2013
$1,317,136 ÷ $754,892 = 1.74
Case 13–17 (concluded)
3. A current ratio that is too low implies that the company may not have sufficient
current assets to meet its current obligations. That company is under pressure to
raise cash to meet current obligations. For example, it might try to quickly sell
inventory at a profit or obtain additional long-term financing by issuing debt or
A high current ratio also can be driven by a current liability balance that is too
low, which could occur if the company is paying suppliers too quickly. That
also is inefficient, because waiting as long as possible to pay suppliers lets the
13–2 Intermediate Accounting, 8e
Real World Case 13–18
Requirement 1
A liability is accrued if it is both probable that a loss will occur and the amount can
be at least reasonably estimated. Most consumer products are accompanied by a
warranty or guarantee. Warranties and guarantees are loss contingencies for which
Requirement 2
When the announcement was made, analyst Richard Doherty stated that either a
high number of Xbox 360s will fail or the company is being overly conservative in its
Real World Case 13–19
Requirement 1
Per AU Optronics’ (Form 20-F, filed 3/21/2014): When there is a continuous range of
possible outcomes, with each point in the range as likely as any other, what amount is
accrued as the estimate of the obligation?
Requirement 2
B Communications LTD (Form 20-F, filed 3/7/2014): With respect to legal claims, at
what probability level would B Communications accrue a liability for a possible
litigation loss?
Legal claims
Contingent liabilities are accounted for according to IAS 37 and its
related provisions. Accordingly, the claims are classified by likelihood
of realization of the exposure to risk, as follows:
13–4 Intermediate Accounting, 8e
Real World Case 13–20
Requirement 1
The acquisition is a subsequent event, given that J. Crew’s fiscal year ends on
Requirement 2
a. Yes, J. Crew has recorded a $10 million reserve. It would record a journal
entry like the following:
Trueblood Accounting Case 13–21
[Note: This case encourages the student to reference authoritative pronouncements.]
13–6 Intermediate Accounting, 8e
Air France–KLM Case
Requirement 1
AF-KLM receives payment for flight services in advance of delivery of those
services. Upon receipt of payment, AF-KLM records a liability, deferred revenue, and
Requirement 2
Under both U.S. GAAP and IFRS, liabilities associated with a past event are
recorded when the obligation is probable and the amount of the obligation can be
Requirement 3
a. Yes, the total beginning balances (totaling €3,713, consisting of €3,158 noncurrent
Air France Case (concluded)
b. Journal entries for the following changes in the litigation provision that occurred
during fiscal 2013:
i. New provision
76
ii. Use of provision
Requirement 4
Under IFRS, “contingent liabilities” are disclosed and not accrued as a liability in the
balance sheet or recognized as an expense in the income statement. These are
Provision expense
76
Retirement benefits
43
Cash
43