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Chapter 13: Q1Q (page 658)
Question: Distinguish between debt security and equity security.
Answer
Some of the differences between them are ownership, maturity date, type of return, voting right, and management participation.
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Question: On October 15, 2017, Oil Products Co. purchased 4,000 barrels of fuel oil with a cost of
\(240,000 (\)60 per barrel). Oil Products is holding this inventory in anticipation of the winter 2018 heating season. Oil Products
accounts for its inventory at the lower-of-FIFO-cost-or-net realizable value. To hedge against potential declines in the value of
the inventory, Oil Products also purchased a put option on the fuel oil. Oil Products paid an option premium of \(300 for the put
option, which gives Oil Products the option to sell 4,000 barrels of fuel oil at a strike price of \)60 per gallon. The option expires
on March 1, 2018. The following data are available with respect to the values of the fuel of inventory and the put option.
Date Market Price of Fuel Oil Time Value of Put Option
October 31, 2017 \(58 per gallon \)175
November 30, 2017 57 per gallon 105
December 31, 2017 54 per gallon 40
Instructions
(a) Prepare the journal entries of Oil Products for the following dates.
(1) October 15, 2017鈥擮il Products purchases fuel oil and the put option on fuel oil.
(2) October 31, 2017鈥擮il Products prepares financial statements.
(3) November 30, 2017鈥擮il Products prepares financial statements.
(4) December 31, 2017鈥擮il Products prepares financial statements.
(b) Indicate the amount(s) reported on the balance sheet and income statement related to the fuel oil inventory and the put
option on November 30, 2017.
(c) Indicate the amount(s) reported on the balance sheet and income statement related to the fuel oil and the put option on
December 31, 2017.
How does unearned revenue arise? Why can it be classified properly as a current liability? Give several examples of business activities that result in unearned revenues.
(Loss Contingencies: Entries and Essays) Polska Corporation, in preparation of its December 31, 2017, financial statements, is attempting to determine the proper accounting treatment for each of the following situations.
1. As a result of uninsured accidents during the year, personal injury suits for \(350,000 and \)60,000 have been filed against the company. It is the judgment of Polska鈥檚 legal counsel that an unfavorable outcome is unlikely in the \(60,000 case but that an unfavorable verdict approximating \)250,000 will probably result in the \(350,000 case.
2. Polska owns a subsidiary in a foreign country that has a book value of \)5,725,000 and an estimated fair value of \(9,500,000. The foreign government has communicated to Polska its intention to expropriate the assets and business of all foreign investors. On the basis of settlements other firms have received from this same country, Polska expects to receive 40% of the fair value of its properties as final settlement.
3. Polska鈥檚 chemical product division consisting of five plants is uninsurable because of the special risk of injury to employees and losses due to fire and explosion. The year 2017 is considered one of the safest (luckiest) in the division鈥檚 history because no loss due to injury or casualty was suffered. Having suffered an average of three casualties a year during the rest of the past decade (ranging from \)60,000 to $700,000), management is certain that next year the company will probably not be so fortunate.
Instructions
(a) Prepare the journal entries that should be recorded as of December 31, 2017, to recognize each of the situations above.
(b) Indicate what should be reported relative to each situation in the financial statements and accompanying notes. Explain why.
Carow Corporation purchased, as a held-for-collection investment, \(60,000 of the 8%, 5-year bonds of Harrison, Inc.
for \)65,118, which provides a 6% return. The bonds pay interest semiannually. Prepare Carow鈥檚 journal entries for (a) the purchase
of the investment, and (b) the receipt of semiannual interest and premium amortization
Presented below is the December 31 trial balance of New York Boutique.
NEW YORK BOUTIQUE TRIAL BALANCE DECEMBER 31 | ||
Debit | Credit | |
Cash | \( 18,500 | |
Accounts Receivable | 32,000 | |
Allowance for Doubtful Accounts | \) 700 | |
Inventory, December 31 | 80,000 | |
Prepaid Insurance | 5,100 | |
Equipment | 84,000 | |
Accumulated Depreciation鈥擡quipment | 35,000 | |
Notes Payable | 28,000 | |
Common Stock | 80,600 | |
Retained Earnings | 10,000 | |
Sales Revenue | 600,000 | |
Cost of Goods Sold | 408,000 | |
Salaries and Wages Expense (sales) | 50,000 | |
Advertising Expense | 6,700 | |
Salaries and Wages Expense (administrative) | 65,000 | |
Supplies Expense | 5,000 |
|
\(754,300 | \)754,300 | |
Instructions
a. Construct T-accounts and enter the balances shown.
b. Prepare adjusting journal entries for the following and post to the T-accounts. (Omit explanations.) Open additional T-accounts as necessary. (The books are closed yearly on December 31.)
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