PROBLEM 13-9B (Continued)
2015
Inventory of Premiums ……………………………………………
400,000
Cash ………………………………………………………………
400,000
(To record the purchase of 500,000
download codes at $0.80 each)
Cash ………………………………………………………………………
Sales Revenue ………………………………………………..
(To record the sale of 7,600,000 candy
bars at 20 cents each)
Cash
310,000
Premium Liability ……………………………………………………
37,200
Premium Expense …………………………………………………..
148,800
Inventory of Premiums ……………………………………
496,000
(To record the redemption of 3,100,000
wrappers, the receipt of $310,000
[(3,100,000 ÷ 5) X $0.50], and the emailing
of 620,000 download codes.)
620,000 download codes @ $0.80 = ……………….
Less: Cash received— (3,100,000 ÷ 5) X $0.50 ….
Premium expense for CDs issued ……………………
Less: Outstanding claims at 12/31/14
charged to 2014 but redeemed in 2015 …….
Premium Expense …………………………………………………..
$ 21,600*
Premium Liability ……………………………………………
21,600
PROBLEM 13-9B (Continued)
(b)
Account
2014
2015
Classification
Inventory of Premiums
*
Current asset
Premiums Liability
37,200
Current liability
*
$0.80 (600,000 – 320,000)
PROBLEM 13-10B
(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, Islamorada Fishing and Scuba Tours should
Note to the Financial Statements
Due to an accident which occurred during 2014, the Company is a
(b) Islamorada Fishing and Scuba Tours need not establish a liability for
risk of loss from lack of insurance coverage itself. GAAP does not
require or allow the establishment of a liability for expected future injury
PROBLEM 13-11B
(a)
1.
Lawsuit Loss ……………………………………………………….
261,000
Lawsuit Liability ……………………………………………..
261,000
2.
No entry required.
3.
Loss from Expropriation …………………………..
3,066,000
Allowance for Expropriation
(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
PROBLEM 13-11B (Continued)
2.
Even though Starfish’s deep sea exploration 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 liabilities incurred nor is an amount reasonably
estimable. Therefore, this situation does not satisfy the criteria
PROBLEM 13-11B (Continued)
3.
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 13-12B
(1)
Sales of Swimming pools ………………………………………………
$6,400,000
Estimated warranty cost ………………………………………………..
X 0.06
Warranty expense for 2014…………………………………….
$ 384,000
(2)
Estimated liability for warranties—1/1/14 ………………………..
$ 129,000
Subtotal ……………………………………………………………….
Actual warranty costs during 2014 …………………………………
Estimated liability from warranties—12/31/14 ………………….
(3)
Coupons issued (1 coupon/$1 sale) ……………………………….
1,100,000
Estimated redemption rate …………………………………………….
0.40
Estimated number of coupons to be redeemed ……………….
Exchange rate (250 coupons for a pool toy) ……………………
Estimated number of pool toys to be issued ………………….
Net cost of CD players ($16 – $5) ……………………………………
Premium expense for 2014 …………………………………….
$ 19,360
(4)
Inventory of pool toys—1/1/14 ……………………………………….
$ 6,100
Pool toys purchased during 2014 (2,500 X $16) ……………….
40,000
Pool toys available ……………………………………………………….
Pool toys exchanged for coupons
during 2014 (286,000/250 X $16) …………………………………..
18,304
Inventory of pool toys—12/31/14 ……………………………………
$ 27,796
(5)
Estimated liability for premiums—1/1/14 …………………………
$ 11,800
2014 premium expense (Requirement 3) …………………………
19,360
Subtotal ……………………………………………………………….
Actual redemptions during 2014
[286,000/250 X ($16 – $5)] …………………………..……………….
12,584
Estimated liability for premiums—12/31/14 ……………………..
$ 18,576
PROBLEM 13-13B
1. Memo prepared by:
Date:
Sequoia Corporation
December 31, 2014
Recognition of Warranty Expense
During August of this year, the client began the manufacture and sale of a
new blender. Sales of 381,000 blenders during this period amounted to
$22,860,000. These blenders were sold under a one-year warranty, and the
Because Sequoia accounts for warranties on the accrual basis, it must
recognize the entire $1,524,000 as warranty expense in the year of sale. The
client should have made the following journal entries:
(a) Cash …………………………………………………………. 22,860,000
Sales Revenue (381,000 X $60) …………… 22,960,000
(To record sale of 381,000 dishwashers)
PROBLEM 13-13B (Continued)
2. Memo prepared by:
Date:
Sequoia Corporation
December 31, 2014
Loss Contingency on
Patent Infringement Litigation
In answer to my attorney letter requesting information about any possible
litigation associated with the client, counsel informed me that the client is
in the middle of a patent infringement suit with Crusher Blenders, Inc. over
PROBLEM 13-13B (Continued)
3. Memo prepared by:
Date:
Sequoia Corporation
December 31, 2014
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 13-14B
1. Estimated warranty costs:
On 2013 sales $2,650,000 X 0.11 ………………………….
$291,500
On 2014 sales $2,400,000 X 0.11 ………………………….
264,000
On 2015 sales $3,060,000 X 0.11 ………………………….
336,600
Total estimated costs ………………………………….
Total warranty expenditures ………………………..
382,100*
2.
Computation of liability for premium claims outstanding:
Unredeemed coupons for 2014
$ 21,000
2015 coupons exchanged