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Chapter 13: Q17-6Q (page 658)
Question: Explain how trading debt securities are accounted for and reported?
Answer:
Trading debt securities are reported on their fair value.
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Distinguish between a current liability, such as accounts payable, and a provision.
BE13-11 (L03) Buchanan Company recently was sued by a competitor for patent infringement. Attorneys have determined that it is probable that Buchanan will lose the case and that a reasonable estimate of damage to be paid by Buchanan is \(300,000. In light of this case, Buchanan is considering establishing a \)100,000 self-insurance allowance. What entry(ies), if any, should Buchanan record to recognize this loss contingency?
Dos Passos Company sells televisions at an average price of \(900 and also offers to each customer a separate 3-year warranty contract for \)90 that requires the company to perform periodic services and to replacedefective parts. During 2017, the company sold 300 televisions and 270 warranty contracts for cash. It estimates the 3-year warrantycosts as \(20 for parts and \)40 for labor, and accounts for warranties separately. Assume sales occurred on December 31,2017, and straight-line recognition of warranty revenues occurs.
Instructions
(a) Record any necessary journal entries in 2017.
(b) What liability relative to these transactions would appear on the December 31, 2017, balance sheet and how would it beclassified?
In 2018, Dos Passos Company incurred actual costs relative to 2017 television warranty sales of \(2,000 for parts and \)4,000 forlabor.
(c) Record any necessary journal entries in 2018 relative to 2017 television warranties.
(d) What amounts relative to the 2017 television warranties would appear on the December 31, 2018, balance sheet andhow would they be classified?
Question: 13-17 (L04) (Ratio Computations and Discussion) Sprague Company has been operating for several years, and on December 31, 2017, presented the following balance sheet.
| SPRAGUE COMPANY | |||
| BALANCE SHEET | |||
| DECEMBER 31, 2017 | |||
Cash | \(40,000 | Accounts payable | \)80,0000 |
Receivables | \(75,0000 | Mortgage payable | \)140,000 |
Inventory | \(95,000 | Common stock (\)1 par) | \(150,000 |
Plant assets (net) | \)220,000 | Retained earnings | \(60,000 |
\)430,000 | \(430,000 | ||
The net income for 2017 was \)25,000. Assume that total assets are the same in 2016 and 2017.
Instructions
Compute each of the following ratios. For each of the four, indicate how it is computed and its significance as a tool in the analysis of the financial soundness of the company.
(a) Current ratio. (C) Debt to assets ratio.
(b) Acid-test ratio. (d) Return on assets.
(Warranties) Brooks Corporation sells computers under a 2-year warranty contract that requires the corporation to replace defective parts and to provide the necessary repair labor. During 2017, the corporation sells for cash 400 computers at a unit price of \(2,500. On the basis of past experience, the 2-year warranty costs are estimated to be \)155 for parts and \(185 for labor per unit. (For simplicity, assume that all sales occurred on December 31, 2017.) The warranty is not sold separately from the computer.
Instructions
(a) Record any necessary journal entries in 2017.
(b) What liability relative to these transactions would appear on the December 31, 2017, balance sheet and how would it be classified?
(c) In 2018, the actual warranty costs to Brooks Corporation were \)21,400 for parts and $39,900 for labor. Record any necessary journal entries in 2018.
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