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Acc 308 -week1- 1-3 Homework: Chapter 9

1. Accounts Payable

The balance in Ashwood Company's Accounts Payable account at December 31, 2016, was $1,200,000
before any necessary year-end adjustment relating to the following:

Goods were in transit from a vendor to Ashwood on December 31, 2016. The invoice cost was $85,000,
and the goods were shipped FOB shipping point on December 29, 2016. The goods were received on
January 2, 2017.

Goods shipped FOB shipping point on December 20, 2016, from a vendor to Ashwood were lost in
transit. The invoice cost was $40,000. On January 5, 2017, Ashwood filed a $40,000 claim against the
common carrier.

Goods shipped FOB destination on December 22, 2016, from a vendor to Ashwood were received on
January 6, 2017. The invoice cost was $20,000.

What amount should Ashwood report as accounts payable on its December 31, 2016, balance sheet?

a.$1,345,000

b.$1,285,000

c.$1,260,000

d.$1,325,000 = 1200,000 + 85,000 + 40,000

2. Current Liabilities

When a company receives a deposit from a customer to protect itself against nonpayment for future
services, the deposit should be classified by the company as:

a.a liability

b.revenue

c.a deferred credit deducted from accounts receivable

d.part of the allowance for doubtful accounts

3. Current Liabilities

Bronson Apparel Inc. operates a retail store and must determine the proper December 31, 2016, year-
end accrual for the following expenses:

The store lease calls for fixed rent of $1,000 per month, payable at the beginning of the month, and
additional rent equal to 6% of net sales over $200,000 per calendar year, payable on January 31 of the
following year. Net sales for 2016 are $800,000.

Bronson has personal property subject to a city property tax. The city's fiscal year runs from July 1 to
June 30, and the tax is payable on June 30. Bronson estimates that its personal property tax will amount
to $6,000 for the city's fiscal year ending June 30, 2017.
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In its December 31, 2016, balance sheet, Bronson should report accrued expenses of:

a.$42,000

b.$51,000

c.$39,000 = 6% * (800k – 600k) + 6000/12 * 6

d.$54,000

4. Compensated Absences

Morgan Company determined that (1) it has a material obligation relating to employees' rights to
receive compensation for future absences attributable to employees' services already rendered, (2) the
obligation relates to rights that vest, and (3) payment of the compensation is probable. The amount of
Morgan's obligation as of December 31, 2016, is reasonably estimated for the following employee
benefits:

Vacation pay $100,000

Holiday pay $25,000

What total amount should Morgan report as its liability for compensated absences on its December 31,
2016, balance sheet?

a.$0

b.$100,000

c.$125,000

d.$25,000

5. Warranty Costs

Dynamo Corporation manufactures toasters. Each toaster comes with a 5-year assurance-type warranty.
The toasters sell for $50 each. During Year 1, Dynamo sells 500 toasters, for cash. Past experience shows
that the average warranty costs are $5 each or $2,500 for these toasters. In Year 1, Dynamo pays $600
cash for warranty costs on the toasters sold that year.

Required:

Prepare Dynamo’s journal entries related to the sales and warranty in Year 1.
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6. Warranty Costs

Dynamo Corporation manufactures toasters. Each toaster comes with a 5-year assurance-type warranty.
The toasters sell for $40 each. During Year 1, Dynamo sells 600 toasters, for cash. Past experience shows
that the average warranty costs are $5 each or $3,000 for these toasters. In Year 1, Dynamo pays $700
cash for warranty costs on the toasters sold that year.

Required:

Prepare Dynamo’s journal entries related to the sales and warranty in Year 1.

7. Accounts Payable and Cash Discounts

Byrd Company had the following transactions during 2016 and 2017:

1. On December 24, 2016, a computer was purchased on account from Computers International for
$60,000. Terms of the sale were 2/10, n/30.

2. Byrd calculated that to forgo the discount for the computer would be the equivalent of paying 36%
interest annually for the extra 20 days. Therefore, Byrd went to First Local Bank and signed a
$60,000, 30-day note at 12% in order to take advantage of the discount terms. This transaction took
place on December 29, 2016. (The account payable was paid on January 2, 2017, and the note was
paid at maturity. Assume a 360-day year.)

3. On December 30, 2016, Byrd declared a $2.00 cash dividend to the common shareholders. Ten
thousand shares were outstanding on this date. The dividend is to be paid on January 5, 2017. (Byrd
Company charges dividends directly to retained earnings.)

Required:

1. Prepare the journal entries for Byrd for both 2016 and 2017. Assume that the net price method is
used to account for the credit terms.

2. Show how the preceding items would be reported in the current liabilities section of Byrd’s December
31, 2016, balance sheet.

3. Next Level Assuming Byrd’s current assets were $1,200,000 and its current ratio was 2.4 at the end
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of 2015, compute the current ratio at the end of 2016 (based solely on the effects of the preceding
transactions).

Show how the items would be reported in the current liabilities section of Byrd’s December 31, 2016,
balance sheet.

Assuming Byrd’s current assets were $1,200,000 and its current ratio was 2.4 at the end of 2015,
compute the current ratio at the end of 2016 (based solely on the effects of the preceding transactions).
Round your answer to two decimal places. 1.97
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8. Fallon Company, a toy manufacturer that also operates several retail outlets, is preparing its
December 31, 2016, financial statements. It has identified the following legal situations that may qualify
as contingencies:

1. A customer is suing the company for $800,000 in damages because her child was injured in
November 2016 while riding an escalator that stopped suddenly in one of its stores. The child
was hurt when he tripped and fell while walking “down” an escalator that was going “up.” Legal
counsel feels that the child is partially at fault, but that it is probable that the lawsuit will be
settled for between $50,000 and $100,000, with $80,000 being the most likely amount.

An entry should be prepared to record Fallon's loss contingency. Which of the following is true?

Entries are always recorded for future events.

An entry is recorded because it is an existing condition, a loss is probable, and the loss can be
reasonably estimated.

Both the date of payment and the name of the family are known, so GAAP requires the loss
contingency to be recorded.

2. Fallon has discovered that a skateboard it began manufacturing and selling in 2016 has
defective bearings, sometimes causing a wheel to fall off. Fallon has issued a “recall” notice in
newspapers and magazines in which it offers to replace the bearings. It estimates a cost of
$200,000 for these repairs. No lawsuits have been filed for injury claims, although the company
feels that there is a reasonable possibility that claims may total as high as $2 million.

An entry should be prepared to record Fallon's estimated repair costs. Which of the following is
true?

An entry is recorded because it is an existing condition and the loss can be reasonably
estimated, even though the loss is only reasonably possible.

An entry is recorded because a loss is probable and the loss can be reasonably estimated, even
though there is no existing condition.

An entry is recorded because it is an existing condition, a loss is probable, and the loss can be
reasonably estimated.
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An entry should not be prepared to record Fallon's litigation liability. Which of the following is
true?

Litigation liability is always reported in the notes to the financial statements

An entry is not recorded because a loss is probable and the loss can be reasonably estimated,
even though there is no existing condition.

An entry is not recorded because no lawsuits have been filed and management has determined
that it is only reasonably possible that any loss will be incurred

Fallon's litigation liability should be disclosed in the notes to the financial statements if:

a loss is probable and the loss can be reasonably estimated.

a loss is probable but the amount cannot be reasonably estimated.

it is reasonably possible that a loss will occur and the loss can be reasonably estimated.

3. Fallon has an incinerator behind one of its retail outlets which is used to burn cardboard boxes
received in shipments of inventory from suppliers. The state environmental protection agency
filed suit against the company in August 2016 for air pollution. Fallon expects to stop using the
incinerator and begin recycling. However, its lawyers believe that it is probable that a fine of
between $40,000 and $60,000 will be levied against the company, although they cannot predict
the exact amount.

With regard to the environmental protection agency lawsuit, this loss contingency is accrued
at the end of 2016 because a loss is probable and can be reasonably estimated .

4. In early 2016, Fallon signed a contract with a computer vendor to install “state of the art” cash
registers in all of its retail outlets. Because of the vendor’s inability to acquire sufficient cash
registers, the vendor canceled the contract. Fallon has filed a breach of contract suit against the
vendor, claiming $300,000 in damages. The company’s lawyers expect that it will settle the suit
“out of court” for $150,000.

With regard to the breach of contract lawsuit, because of the conservatism principle , this gain
contingency is not accrued at the end of 2016. Instead, it may be disclosed in the notes to the
financial statements

Required:
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1. Next Level For each situation, prepare the journal entry (if any) on December 31, 2016, to record the
information for Fallon, and explain your reasoning. If no journal entry is recorded, explain how the
information would be disclosed in Fallon’s 2016 annual report.

2. How would your answers change if Fallon used IFRS?

Complete the statements below for each contingency which outlines how your answers might change if
Fallon used IFRS.

With regard to the customer lawsuit, the accounting under IFRS would be the same as U.S. GAAP.

With regard to the potential skateboard litigation, the loss related to the estimated repairs would be
recorded in a similar fashion to U.S. GAAP. IFRS would require that a provision (or contingency) for the
litigation loss be accrued when the outcome is more likely than not to occur and a reliable estimate of
the amount can be made.

With regard to the environmental protection agency lawsuit, IFRS requires that the mid-point of the
range be used to measure the liability.

With regard to the breach of contract lawsuit, the accounting under IFRS would be the same as U.S.
GAAP.