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Chapter 13: Question 8Q (page 715)
How should a debt callable by the creditor be reported in the debtor鈥檚 financial statements?
Debt that is callable by the creditor should be grouped under current liability.
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Question: (Derivative Financial Instrument) Johnstone Co. purchased a put option on Ewing common shares on July 7,
2017, for \(240. The put option is for 200 shares, and the strike price is \)70. (The market price of a share of Ewing stock on that
date is \(70.) The option expires on January 31, 2018. The following data are available with respect to the put option.
Date Market Price of Ewing Shares Time Value of Put Option
September 30, 2017 \)77 per share $125
December 31, 2017 75 per share 50
January 31, 2018, 78 per share 0
Instructions
Prepare the journal entries for Johnstone Co. for the following dates.
(a) July 7, 2017鈥擨nvestment in a put option on Ewing shares.
(b) September 30, 2017鈥擩ohnstone prepares financial statements.
(c) December 31, 2017鈥擩ohnstone prepares financial statements.
(d) January 31, 2018鈥擯ut option expires.
Wynn Company offers a set of building blocks to customers who send in 3 UPC codes from Wynn cereal, along with 50垄. The block sets cost Wynn $1.10 each to purchase and 60垄 each to mail to customers. During 2017, Wynn sold 1,200,000 boxes of cereal. The company expects 30% of the UPC codes to be sent in. During 2017, 120,000 UPC codes were redeemed. Prepare Wynn鈥檚 December 31, 2017, adjusting entry.
Garison Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, recorded music, and sheet music. Garison uses two sales promotion techniques鈥攚arranties and premiums鈥攖o 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鈥檚 total sales for 2017 were \(7,200,000鈥擻)5,700,000 from musical instruments and sound reproduction equipment and \(1,500,000 from recorded music and sheet music. Replacement parts and labor for warranty work totaled \)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
(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.鈥檚 share of Sub Co.鈥檚 net income for the year?
(b) What was Sub Co.鈥檚 total net income for the year?
(c) What were Sub Co.鈥檚 total dividends for the year?
(d) How much was Parent Co.鈥檚 share of Sub Co.鈥檚 dividends for the year?
Calaf鈥檚 Drillers erects and places into service an off-shore oil platform on January 1, 2018, at a cost of \(10,000,000. Calaf is legally required to dismantle and remove the platform at the end of its useful life in 10 years. Calaf estimates it will cost \)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
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