Chapter 13: Current Liabilities and Contingencies

Calaf’s Drillers erects and places into service an off-shore oil platform on January 1, 2018, at a cost of \(10,000,000. Calaf is legally required to dismantle and remove the platform at the end of its useful life in 10 years. Calaf estimatesit will cost \)1,000,000 to dismantle and remove the platform at the end of its useful life in 10 years. (The fair value at January 1,2018, of the dismantle and removal costs is $450,000.) Prepare the entry to record the asset retirement obligation.

Journal Entries for Fair Value and Equity Methods) The following are two independent situations.

Situation 1: Conchita Cosmetics acquired 10% of the 200,000 shares of common stock of Martinez Fashion at a total cost of \(13 per

share on March 18, 2017. On June 30, Martinez declared and paid \)75,000 cash dividends to all stockholders. On December 31,

Martinez reported net income of \(122,000 for the year. At December 31, the market price of Martinez Fashion was \)15 per share.

Situation 2: Monica, Inc. obtained significant influence over Seles Corporation by buying 30% of Seles’s 30,000 outstanding shares

of common stock at a total cost of \(9 per share on January 1, 2017. On June 15, Seles declared and paid cash dividends of \)36,000

to all stockholders. On December 31, Seles reported a net income of $85,000 for the year.

Instructions

Prepare all necessary journal entries in 2017 for both situations.

(Premium Entries) No Doubt Company includes 1 coupon in each box of soap powder that it packs, and 10 coupons are redeemable for a premium (a kitchen utensil). In 2017, No Doubt Company purchased 8,800 premiums at 80 cents each and sold 110,000 boxes of soap powder at $3.30 per box; 44,000 coupons were presented for redemption in 2017. It is estimated that 60% of the coupons will eventually be presented for redemption.

Instructions

Prepare all the entries that would be made relative to sales of soap powder and to the premium plan in 2017.

Question: EXCEL (Derivative Financial Instrument) The treasurer of Miller Co. has read on the Internet that the stock

price of Wade Inc. is about to take off. In order to profit from this potential development, Miller Co. purchased a call option on

Wade common shares on July 7, 2017, for \(240. The call option is for 200 shares (notional value), and the strike price is \)70. (The

market price of a share of Wade stock on that date is \(70.) The option expires on January 31, 2018. The following data are available

with respect to the call option.

Date Market Price of Wade Shares Time Value of Call Option

September 30, 2017 \)77 per share $180

December 31, 2017 75 per share 65

January 4, 2018 76 per share 30

Instructions

Prepare the journal entries for Miller Co. for the following dates.

(a) July 7, 2017—Investment in call option on Wade shares.

(b) September 30, 2017—Miller prepares financial statements.

(c) December 31, 2017—Miller prepares financial statements.

(d) January 4, 2018—Miller settles the call option on the Wade shares.

Garison Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, recorded music, and sheet music. Garison uses two sales promotion techniques—warranties and premiums—to attract customers.

Musical instruments and sound equipment are sold with a 1-year warranty for replacement of parts and labor. The estimated warranty cost, based on past experience, is 2% of sales.

The premium is offered on the recorded and sheet music. Customers receive a coupon for each dollar spent on recorded music or sheet music. Customers may exchange 200 coupons and \(20 for an MP3 player. Garison pays \)32 for each player and estimates that 60% of the coupons given to customers will be redeemed.

Garison’s total sales for 2017 were \(7,200,000—\)5,700,000 from musical instruments and sound reproduction equipmentand \(1,500,000 from recorded music and sheet music. Replacement parts and labor for warranty work totaled \)94,000 during 2017. A total of 6,500 players used in the premium program were purchased during the year and there were 1,200,000 coupons redeemed in 2017.

The balances in the accounts related to warranties and premiums on January 1, 2017, were as shown below.

Inventory of Premiums $ 37,600

Premium Liability 44,800

Warranty Liability 136,000

Instructions

Garison Music Emporium is preparing its financial statements for the year ended December 31, 2017. Determine the amounts that will be shown on the 2017 financial statements for the following.

(a) Warranty Expense. (d) Inventory of Premiums.

(b) Warranty Liability. (e) Premium Liability.

(c) Premium Expense

E13-10 (L03) (Warranties) Soundgarden Company sold 200 color laser copiers on July 10, 2017, for \(4,000 apiece, together with a 1-year warranty. Maintenance on each copier during the warranty period is estimated to be \)330.

Instructions

Prepare entries to record the sale of the copiers, the related warranty costs, and any accrual on December 31, 2017. Actual warranty costs (inventory) incurred in 2017 were $17,000.

Question: What evidence is necessary to demonstrate the ability to defer settlement of short-term debt?

Under what conditions must an employer accrue a liability for employees’ compensation for future absences?

BE 13-13(L03) Streep Factory provides a 2-year warranty with one of its products which was first sold in 2017. Streep sold \(1,000,000 of products subject to the warranty. Streep expects \)125,000 of warranty costs over the next 2 years. In that year, Streep spent $70,000 servicing warranty claims. Prepare Streep’s journal entry to record the sales (ignore cost of goods sold) and the December 31 adjusting entry, assuming the expenditures are inventory costs.

(Equity Method) Parent Co. invested $1,000,000 in Sub Co. for 25% of its outstanding stock. Sub Co. pays out

40% of net income in dividends each year.

Instructions

Use the information in the following T-account for the investment in Sub to answer the following questions.

Investment in Sub Co.

1,000,000

110,000

44,000

(a) How much was Parent Co.’s share of Sub Co.’s net income for the year?

(b) What was Sub Co.’s total net income for the year?

(c) What were Sub Co.’s total dividends for the year?

(d) How much was Parent Co.’s share of Sub Co.’s dividends for the year?