Microsoft Word - Chapter 13 In-class Work.docx
Yang
1
California State University East Bay
ACCT 311 Intermediate Financial Accounting I
Chapter 13 In-class Work
Question 1: On October 1, 2021, Eder Fa
ication bo
owed $70 million and issued a nine-month, 6%
promissory note. Interest was payable at maturity. Prepare the journal entry for the issuance of the note and
the appropriate adjusting entry for the note at December 31, 2021, the end of the reporting period.
Question 2: On October 1, 2021, Life.com issued $18 million of commercial paper on a nine-month note.
Interest was discounted at issuance at an 8% discount rate.
Required:
1. Prepare the journal entry for the issuance of the note
2. Prepare the appropriate adjusting entry for the note at December 31, 2021, the end of the reporting
period.
3. What is the effective interest rate on the commercial paper?
Question 3: In Lizzie Shoes’ experience, gift cards that have not been redeemed within 12 months are not
likely to be redeemed. Lizzie Shoes sold gift cards for $18,650 during August 2021. $5,100 of cards were
edeemed in September 2021, $3,470 in October, $2,700 in November, and $2,980 in December 2021. In
2022 an additional $1,970 of cards were redeemed in January and $695 in Fe
uary. How much gift card
evenue associated with the August 2021 gift card sales would Lizzie get to recognize in 2021 and 2022?
Question 4: During December, Rainey Equipment made $733,150 credit sales, which include the 6% state
tax and the 1.5% local sales tax. Prepare the adjusting entry so fairly present the December 31 financial
statements.
Question 5: Consider the following liabilities of Future Brands, Inc., at December 31, 2021, the company’s
fiscal year-end. Should they be reported as cu
ent liabilities or long-term liabilities?
1. $77 million of 8% notes are due on May 31, 2025. The notes are callable by the company’s bank,
eginning March 1, 2022.
2. $102 million of 8% notes are due on May 31, 2026. A debt covenant requires Future to maintain a
cu
ent ratio (ratio of cu
ent assets to cu
ent liabilities) of at least 2 to 1. Future is in violation of this
equirement but has obtained a waiver from the bank until May 2022, since both companies feel Future
will co
ect the situation during the first half of 2022.
Question 6: Coulson Company is in the process of refinancing some long-term debt. Its fiscal year ends on
December 31, 2021, and its financial statements will be issued on March 15, 2022. Under cu
ent U.S.
GAAP, how would the debt be classified if the refinancing is completed on December 15, 2021? What if
instead it is completed on January 15, 2022?
Question 7: Fleener Company is in the process of refinancing some long-term debt. Its fiscal year ends on
December 31, 2021, and its financial statements will be issued on March 15, 2022. Under cu
ent IFRS, how
would the debt be classified if the refinancing is completed on December 15, 2021? What if instead it is
completed on January 15, 2022?
Yang
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Question 8: Right Medical introduced a new implant that ca
ies a five-year wa
anty against manufacturer’s
defects. Based on industry experience with similar product introductions, wa
anty costs are expected to
approximate 1% of sales. Sales were $27 million and actual wa
anty expenditures were $33,750 for the first
year of selling the product. What amount (if any) should Right report as a liability at the end of the year?
Question 9: Consultants notified management of Goo Goo Baby Products that a crib toy poses a potential
health hazard. Counsel indicated that a product recall is probable and is estimated to cost the company $3.3
million. How will this affect the company’s income statement and balance sheet this period?
Question 10: Skill Hardware is the plaintiff in a $16 million lawsuit filed against a supplier. The litigation is
in final appeal and legal counsel advises that it is virtually certain that Skill will win the lawsuit and be
awarded $12 million. How should Skill account for this event?
Question 11: Bell International estimates that a $10 million loss will occur if a foreign government
expropriates some company property. Expropriation is considered reasonably possible. How should Bell
eport the loss contingency?
Question 12: Quandary Corporation has a major customer who is alleging a significant product defect.
Quandary engineers and attorneys have analyzed the claim and have concluded that there is a 51% chance
that the customer would be successful in court and that a successful claim would result in a range of damages
from $10 million to $20 million, with each part of the range equally likely to occur. The damages would
need to be paid soon enough that time-value-of-money considerations are not material. Would a liability be
accrued under U.S. GAAP? Under IFRS? If a liability were accrued, what amount would be accrued under
U.S. GAAP? Under IFRS?
Chapter 13 In-class Work Answers.xlsx
Chap 13 In‐class work
Chapter 13 In‐Class Work Answers
Question 1
Debit Credit
1) 10/1/2021 Cash 70,000,000
Notes Payable 70,000,000
2) 12/31/2021 Interest Expense 1,050,000
Interest Payable 1,050,000
$70,000,000*6%*3/12 = $1,050,000
Question 2
Debit Credit
1) 10/1/2021 Cash 16,920,000
Discount on Notes Payable 1,080,000
Notes Payable 18,000,000
Discount = $18,000,000*8%*9/12 = $1,080,000
Cash received = $18,000,000 ‐ $1,080,000 = $16,920,000
2) 12/31/2021 Interest Expense 360,000
Discount on Notes Payable 360,000
$1,080,000*3/9 = $360,000
3) Effective tax rate = interest/cash received = $1,080,000/$16,920,000*12/9 = 8.51%
Question 3
1) 2021 gift card revenues = $5,100 + $3,470 + $2,700 + $2,980 = $14,250
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Chap 13 In‐class work
2) 2022 gift card revenues
Redemption in January 1,970
Redemption in Fe
uary 695
Gift card
eakage 1,735 ($18,650 ‐ $14,250 ‐ $1,970 ‐ $695)
4,400
Question 4
$733,150/(1+7.5%) = $682,000 (sales revenues)
Sales tax payable = $682,000*7.5% = $51,150
Debit Credit
12/31/2021 Accounts receivable 733,150
Sales revenues 682,000
Sales tax payable 51,150
Question 5
1) Since the notes are callable beginning March 1, 2022, they should be classified as cu
ent liabilities
2) Future is in violation of this requirement but has obtained a waiver from the bank until May 2022.
Therefore, these notes are classified as noncu
ent liabilities.
Question 6
1) Under US GAAP, if the refinancing is completed on December 15, 2021, the debt will be classified as noncu
ent liabilities
2) Under U.S. GAAP, if the refinancing is completed on January 15, 2022, the debt will be classified as noncu
ent liabilities,
since it is before financial statements are issued.
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Chap 13 In‐class work
Question 7
1) Under IFRS, if the refinancing is completed on December 15, 2021, the debt will be classified as noncu
ent liabilities
2) Under IFRS, if the refinancing is completed on January 15, 2022, which is after fiscal year end, the debt will be classified as cu
ent liabilities,
since it is required that the refinancing has to be completed before fiscal year end to be considered as cu
ent liabilities.
Question 8
Right Medical should recognize $27M*1% = $270,000 of wa
anty expense this yea
Debit Credit
Wa
anty Expense 270,000
Wa
anty Liabilities 270,000
At the same time, because of actual wa
anty expenditure of $33,750
Wa
anty Liabilities 33,750
Cash 33,750
Wa
anty liabilities will be reported at $270,000 ‐ $33,750 = $236,250 at the end of the year.
Question 9
Since a product recall is probable and estimatable, the following entry needs to be done:
Debit Credit
Loss 3,300,000
Liabilities 3,300,000
The loss will decrease net income on income statement by $3.3 million.
On the balance sheet, liabilities will be increased by $3.3 million.
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Chap 13 In‐class work
Question 10
Since this is a gain contingency, it cannot be accrued the gain ahead of time.
The company can make a disclosure note about this contingency.
Question 11
This is a loss contingency and the chance of expropriation is considered reasonably possible.
Therefore, the company only makes a disclosure note. It does not need to accrue the situation as a loss yet.
Question 11
Since there is a 51% chance that the customer will win, under the US GAAP, it is not probable that a loss will occur.
Under the IFRS, it is probable that a loss will occur.
Therefore, a liability will not be accrued under U.S. GAAP but will be accrued under IFRS.
Under IFRS, the amount accrued will be $15 million (the midpoint of the range).
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