PROBLEM 13.5
(a)
Cash (400 X $2,500) ………………………………………………..
1,000,000
Warranty Expense (400 X [$155 + $185]) …………………..
136,000
Sales Revenue ……………………………………………….
1,000,000
Warranty Liability ……………………………………………
136,000
(b)
$68,000
$68,000
(c)
PROBLEM 13.6
(a)
Cash ………………………………………………………………………
294,300
Sales Revenue (300 X $900) …………………………..
270,000
Unearned Warranty Revenue (270 X $90) …………….
24,300
(b)
Current Liabilities:
Unearned Warranty Revenue ($24,300/3) ………….
(Note: Warranty costs assumed to be
Long-term Liabilities:
(c)
Unearned Warranty Revenue …………………………..
8,100
Warranty Revenue …………………………………………..
8,100
Warranty Expense …………………………………………………..
6,000
Inventory ……………………………………………………….
2,000
Salaries and Wages Payable …………………………..
4,000
(d)
Current Liabilities:
Unearned Warranty Revenue …………………………..
$ 8,100
Long-term Liabilities:
Unearned Warranty Revenue …………………………..
$ 8,100
PROBLEM 13.7
(a)
Cash ……………………………………………………….
4,440,000
Sales Revenue (600 X $7,400) …………………………..
4,440,000
Warranty Expense ([600 X $390] / 2) ………………………….
117,000
Inventory ($170 X 600 X 1/2) …………………………..
51,000
December 31, 2020
(b)
Warranty Expense ……………………………………………………
117,000
Warranty Liability ……………………………………………..
*(600 X $390) − $117,000
(c)
Warranty Liability …………………………………………………….
Inventory…………………………………
51,000
Salaries and Wages Payable …………………………..
PROBLEM 13.8
Inventory of Premiums …………………………………………….
60,000
Cash ………………………………………………………………
60,000
(To record purchase of 40,000 puppets at
$1.50 each)
During 2021
Cash ………………………………………………………………………
Sales Revenue ………………………………………………..
(To record sales of 480,000 boxes at
$3.75 each)
Premium Expense …………………………………………………..
34,500
Inventory of Premiums …………………………………….
34,500
[To record redemption of 115,000 coupons.
Computation: (115,000 ÷ 5) X $1.50 = $34,500]
December 31, 2021
Premium Expense …………………………………………………..
23,100
Premium Liability ……………………………………………
23,100
[To record estimated liability for premium
claims outstanding at December 31, 2021.]
Total estimated redemptions (40%) ………………………….
Coupons redeemed in 2021 ……………………………………..
Cost of estimated claims outstanding (77,000 ÷ 5) X $1.50 = $23,100
PROBLEM 13.9
During 2020
(a)
Inventory of Premiums ……………………………………………
562,500
Cash ………………………………………………………………
562,500
(To record the purchase of 250,000
MP3 downloads at $2.25 each)
Cash ………………………………………………………………………
868,620
Sales Revenue ………………………………………………..
868,620
(To record the sale of 2,895,400 candy bars
at 30 cents each)
Cash [$600,000 – (240,000 X $.50)] …………………………..
480,000
Premium Expense …………………………………………………..
60,000
Inventory of Premiums ……………………………………
540,000
[To record the redemption of 1,200,000
wrappers, the receipt of $600,000
(1,200,000 ÷ 5) X $2.50, and the mailing
of 240,000 MP3 downloads]
Computation of premium expense:
240,000 Codes @ $2.25 each = ………………………
Postage—240,000 X $.50 = …………………………..
Less: Cash received—
240,000 X $2.50 …………………………………
December 31, 2020
Premium Expense …………………………………………………..
14,500*
Premium Liability ……………………………………………
14,500
(To record the estimated liability for
premium claims outstanding at 12/31/20)
PROBLEM 13.9 (Continued)
During 2021
Inventory of Premiums …………………………………………….
742,500
Cash ………………………………………………………………
742,500
Cash ………………………………………………………………………
Sales Revenue ………………………………………………..
823,080
(To record the sale of 2,743,600 candy
bars at 30 cents each)
Cash ($750,000 – $150,000) ………………………………………
600,000
Premium Liability ……………………………………………………
14,500
Premium Expense …………………………………………………..
60,500
Inventory of Premiums …………………………………….
675,000
(To record the redemption of 1,500,000
wrappers, the receipt of $750,000
[(1,500,000 ÷ 5) X $2.50], and the mailing
of 300,000 Codes.)
Computation of premium expense:
300,000 Codes @ $2.25 = ………………………………
Postage—300,000 @ $.50 = ………………………….
150,000
825,000
Less: Cash received—
(1,500,000 ÷ 5) X $2.50…………………………..
750,000
Premium expense for Codes issued …………………
75,000
Less: Outstanding claims at 12/31/20
charged to 2020 but redeemed in 2021 ……
14,500
Premium expense chargeable to 2021 ………………
$ 60,500
Premium Expense …………………………………………………..
Premium Liability ……………………………………………
PROBLEM 13.9 (Continued)
(b)
Amount
Account
2020
2021
Classification
Inventory of Premiums
*
Current asset
Premium Liability
Current liability
Premium Expense
***
****
Selling expense
*
$2.25 (250,000 – 240,000)
**
$2.25 (10,000 + 330,000 – 300,000)
$60,000 + $14,500
$60,500 + $17,500
PROBLEM 13.10
(a) Because the cause for litigation occurred before the date of the finan–
cial statements and because an unfavorable outcome is probable and
reasonably estimable, Windsor Airlines should report a loss and a
Note to the Financial Statements
Due to an accident which occurred during 2020, the Company is a
(b) Windsor Airlines need not establish a liability for risk of loss from lack
of insurance coverage itself. GAAP does not require or allow the estab-
PROBLEM 13.11
(a)
1.
Lawsuit Loss ……………………………………………………….
250,000
Lawsuit Liability ………………………………………………
250,000
2.
Loss from Expropriation …………………………..
Allowance for Expropriation
3.
No entry required.
(b)
1.
A loss and a liability have been recorded in the first case because
(i) information is available prior to the issuance of the financial
2.
An entry to record a loss and establish an allowance due to threat
of expropriation is necessary because the expropriation is imminent
as evidenced by the foreign government’s communicated intent
to expropriate and the prior settlements for properties already
PROBLEM 13.11 (Continued)
3.
Even though Polska’s chemical product division is uninsurable
due to high risk and has sustained repeated losses in the past, as
of the balance sheet date no assets have been impaired or liabili–
ties incurred nor is an amount reasonably estimable. Therefore,
this situation does not satisfy the criteria for recognition of a loss
PROBLEM 13.12
(a)
Actual costs incurred for 2020 sales ($94,000 – $44,000) ..
$50,000
Accrual at 12/31/20 ……………………………………………………….
7,000*
*([$5,700,000 X 1%] – $50,000) ………………………………..
$ 57,000
(b)
Estimated liability for warranties—1/1/20 ………………………..
$ 56,000
Subtotal ……………………………………………………….………
Actual warranty costs during 2020 on pre-2020 sales ……..
(c)
Coupons issued (1 coupon/$1 sale) ……………………………….
1,500,000
Estimated redemption rate …………………………………………….
.60
Estimated number of coupons to be redeemed ……………….
900,000
Exchange rate (200 coupons for a player) ………………………
÷ 200
Estimated number of premium players
to be issued ……………………………………………………………….
4,500
Net cost of players ($32 – $20) ……………………………………….
X 12
Premium expense for 2020 …………………………………….
$ 54,000
(d)
Inventory of premium players—1/1/20 …………………………..
$ 37,600
Premium players purchased during 2020
(6,500 X $32) ………………………………………………………………
208,000
Premium players available …………………………………………….
245,600
Premium players exchanged for coupons
during 2020 (1,200,000/200 X $32) ………………………………..
192,000
Inventory of premium players—12/31/20 …………………………
$ 53,600
(e)
Estimated liability for premiums—1/1/20 …………………………
$ 44,800
54,000
Subtotal ……………………………………………………….………
98,800
Actual redemptions during 2020
[1,200,000/200 X ($32 – $20)] ……………………………………….
72,000
Estimated liability for premiums—12/31/20 ……………………..
$ 26,800
PROBLEM 13.13
1. Memo prepared by:
Date:
Millay Corporation
December 31, 2020
Recognition of Warranty Expense
During June of this year, the client began the manufacture and sale of a
new line of dishwasher. Sales of 120,000 dishwashers during this period
Millay must recognize warranty expense for both actual and expected
warranty costs in the year of sale. The client should have made the
following journal entries:
Cash …………………………………………………………. 60,000,000
2. Memo prepared by:
Date:
Millay Corporation
December 31, 2020
Loss Contingency from Violation
Of EPA Regulations
I contacted the client’s counsel via a routine attorney letter, asking for
information about possible litigation in which the company might be
Because this loss is both probable and reasonably estimable, it must be
accrued as a contingent liability. I advised the client to record the following
entry to accrue this liability.
PROBLEM 13.13 (Continued)
3. Memo prepared by:
Date:
Millay Corporation
December 31, 2020
Loss Contingency on
Patent Infringement Litigation
In answer to my attorney letter requesting information about any possible
litigation associated with the client, Morgan Sondgeroth informed me that
PROBLEM 13.14
1. Estimated warranty costs:
On 2019 sales $ 800,000 X .10 …………………………...
$ 80,000
On 2020 sales $1,100,000 X .10 …………………………...
110,000
On 2021 sales $1,200,000 X .10 …………………………...
Total estimated costs …………………………..……..
Total warranty expenditures ………………………..
2.
Computation of liability for premium claims outstanding:
Unredeemed coupons for 2020
($9,000 – $8,000) ……………………………………………..
($30,000 X .40) …………………………………………………
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 13.1 (Time 20–25 minutes)
Purpose—to provide the student with the opportunity to define a liability, to distinguish between current
CA 13.2 (Time 15–20 minutes)
Purpose—to provide three situations that require the application of judgment about the current or long–
classified as current.
CA 13.3 (Time 30–40 minutes)
Purpose—to provide the student with a comprehensive case covering refinancing of short-term debt.
CA 13.4 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to comment on the proper treatment in the
CA 13.5 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to specify the conditions by which a loss
CA 13.6 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to discuss how product warranty costs and the fact
CA 13.7 (Time 20–25 minutes)
Purpose—to provide the student with an opportunity to examine the ethical issues related to estimates
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 13.1
(a) A liability is defined as “probable future sacrifices of economic benefits arising from present
obligations of a particular entity to transfer assets or provide services to other entities in the future
as a result of past transactions or events.” In other words, it is an obligation to transfer some type
of resource in the future as a result of a past transaction.
(d) Theoretically, liabilities should be measured by the present value of the future outlay of cash
required to liquidate them. But in practice, current liabilities are usually recorded in accounting
records and reported in financial statements at their maturity value. Because of the short time
periods involved—frequently less than one year—the difference between the present value of a
current liability and the maturity value is not large. The slight overstatement of liabilities that results
from carrying current liabilities at maturity value is accepted on the grounds it is immaterial.
CA 13.2
1. Since the notes payable are due in less than one year from the balance sheet date, they would
generally be reported as a current liability. The only situation in which this short–term obligation
could possibly be excluded from current liabilities is if either (1) the liability is contractually due to be
settled more than one year (or operating cycle, if longer) after the balance sheet date or (2) the
CA 13.2 (Continued)
2. Generally, deposits from customers would be classified as a current liability. However, the
classification of deposits as current or noncurrent depends on the time involved between the date
3. Salaries and wages payable is an accrued liability which in almost all circumstances would be
CA 13.3
(This case requires some research of FASB Codification.)
(a) No. GAAP indicates that refinancing a short-term obligation on a long-term basis means either replacing
sheet date.
(b) No. The events described will not have an impact on the financial statements since Dumars
Corporation refinanced the long-term debt maturing in March 2021 after the balance sheet date.
The $10,000,000 should be classified as current at December 31, 2020.
(c) (1) No. Since Dumars has the contractual right to defer payment beyond 12 months of the
CA 13.4
Because the casualty occurred subsequent to the balance sheet date, it does not meet the criteria of a
loss contingency; that is, an asset had not been impaired or a liability incurred at the date of the
balance sheet. Therefore, a loss contingency should not be accrued by a charge to expense due to the
CA 13.5
(a) Two conditions must exist before a loss contingency is recorded:
(b) When some amount within the range appears at the time to be a better estimate than any other
(c) If the amount of the loss is uncertain, the following disclosure in the notes is required:
1. The nature of the contingency.
2. An estimate of the possible loss or range of loss or a statement that an estimate cannot be
made.
CA 13.6
Part 1. For Product Grey, the estimated product warranty costs should be accrued by a charge to
expense and a credit to a liability because both of the following conditions were met:
Part 2. The probable judgment ($1,000,000) should be accrued by a charge to expense and a credit to
a liability because both of the following conditions were met:
1. It is probable that a liability has been incurred because Constantine’s lawyer states that it is
CA 13.6 (Continued)
Constantine should disclose in its financial statements or notes the following:
The amount of the suit ($4,000,000).
CA 13.7
(a) No, Hamilton should not follow his owner’s directive if his (Hamilton’s) original estimates are
reasonable.
(b) Rich Clothing Store benefits in lower rental expense. The Dotson Company is harmed because the