Hi! As we have spoke before, my final exam is this coming Monday, Dec 7th, I have to start the exam at 12:45pm sharp. Please let me know if you will be available. It's a final exam containing 3 chapters ( you already took 2 quizzes these past weeks)
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 Fabrication borrowed $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 redeemed 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 February. How much gift card revenue 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 current 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, beginning March 1, 2022. 2. $102 million of 8% notes are due on May 31, 2026. A debt covenant requires Future to maintain a current ratio (ratio of current assets to current liabilities) of at least 2 to 1. Future is in violation of this requirement but has obtained a waiver from the bank until May 2022, since both companies feel Future will correct 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 current 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 current 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 2 Question 8: Right Medical introduced a new implant that carries a five-year warranty against manufacturer’s defects. Based on industry experience with similar product introductions, warranty costs are expected to approximate 1% of sales. Sales were $27 million and actual warranty 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 report 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 Page 1 of 4 Chap 13 In‐class work 2) 2022 gift card revenues Redemption in January 1,970 Redemption in February 695 Gift card breakage 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 current 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 noncurrent liabilities. Question 6 1) Under US GAAP, if the refinancing is completed on December 15, 2021, the debt will be classified as noncurrent liabilities 2) Under U.S. GAAP, if the refinancing is completed on January 15, 2022, the debt will be classified as noncurrent liabilities, since it is before financial statements are issued. Page 2 of 4 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 noncurrent 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 current liabilities, since it is required that the refinancing has to be completed before fiscal year end to be considered as current liabilities. Question 8 Right Medical should recognize $27M*1% = $270,000 of warranty expense this year Debit Credit Warranty Expense 270,000 Warranty Liabilities 270,000 At the same time, because of actual warranty expenditure of $33,750 Warranty Liabilities 33,750 Cash 33,750 Warranty 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. Page 3 of 4 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). Page 4 of 4