Reference no: EM132217783
Intermediate Accounting Assignment - Liabilities
Problem 1 - You are assigned to the audit of Falcon Corp's December 31, 20x5 year-end. Falcon is a publicly accountable entity. You have come across the following while reviewing the minutes of the board of director's meetings.
1. On September 30, 20x5, one of the products sold by Falcon exploded causing injury to a customer. The customer is suing Falcon for $1,000,000. Legal counsel believes that Falcon will ultimately be held liable and believes that the probability distribution of a payout is as follows:
|
Probability
|
Payout
|
|
30%
|
$0
|
|
60%
|
500,000
|
|
10%
|
1,000,000
|
2. During 20x5, Falcon introduced a new product and provided customers with a 3- year warranty on the product. Because the product was new, Falcon did not accrue a warranty liability. However, according to industry data for similar products, the average cost to service the warranty for a similar product is as follows:
Year 1 - $5
Year 2 - 8
Year 3 - 20
Falcon sold 2,500 of this product during 20x5.
Required - For each of the situations, estimate the provision that needs to be accrued, if any. Also explain using the decision chart for provisions how you arrive at the conclusion that a provision needs to be accrued.
For each situation, use the following table to analyze the situation.
|
Present obligation as a result of a past event
|
|
|
Probable outflow
|
|
|
Measurable?
|
|
|
Conclusion
|
|
Problem 2 - The Cardall Corporation, a publicly accountable entity, provides a customer loyalty program for their customers. For every dollar of sales, customers earn one point. Points can be redeemed for store merchandise as follows: every 1,000 points allows the customer to purchase $25 of merchandise. On average, 60% of the customers have signed up for this program and it is expected that the redemption rate will be 80%.
Sales for 20x6 were $24,500,000 and a total of 7,500,000 points were redeemed.
Required - Prepare the journal entries relating to the customer loyalty program for the year 20x6. Only entries to the deferred revenues and revenues accounts are required.
Problem 3 - On December 31, 20x0, the Einaudi Corporation issues $4,000,000 of 5% bonds. The bonds are due on December 31, 20x12 and were issued to yield 4.8%. The bonds pay interest semi-annually on June 30 and December 31. Bond issue costs of $46,500 were incurred.
Required -
a) Prepare all journal entries relative to this bond issue for the years ended December 31, 20x0 and December 31, 20x1.
b) Assume that on July 2, 20x8, Einaudi repurchases 40% of the bond issue at 105. Prepare the journal entry on July 2, 20x8. Also prepare the journal entry on December 31, 20x8.
Problem 4 - On February 15, 20x1, the Claudio Corporation issues $10,000,000 of 4.3% bonds. The bonds were dated December 31, 20x0, and are due on December 31, 20x15. The bonds were issued to yield 4.6% and pay interest semi-annually on June 30 and December 31.
Required - Prepare all journal entries relative to this bond issue for the year ended December 31, 20x1.