Concept explainers
(Learning Objective 5: Interpret a company’s contingent liabilities) Martinson Cycles, Inc., a motorcycle manufacturer, included the following note in its annual report:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7 (In Part): Commitments and Contingencies
The Company self-insures its product liability losses in the United States up to $3.8 million (catastrophic coverage is maintained for individual claims in excess of $3.8 million up to $26.3 million). Outside the United States, the Company is insured for product liability up to $26.3 million per individual claim and in the aggregate.
1. Why are these contingent (versus real) liabilities?
2. In the United States, how can the
3. How can a contingency outside the United States become a real liability for the company? How does Martinson’s potential liability differ for claims outside the United States?
Want to see the full answer?
Check out a sample textbook solutionChapter 8 Solutions
Financial Accounting (12th Edition) (What's New in Accounting)
- (Learning Objectives 1, 3: Measure, depreciate, and report plant assets) During2018, Ming’s Book Store paid $486,000 for land and built a store in Naperville, Illinois.Prior to construction, the city of Naperville charged Ming’s $1,000 for a building permit,which Ming’s paid. Ming’s also paid $15,000 for architect’s fees. The construction cost of$670,000 was financed by a long-term note payable, with interest costs of $28,020 paid atthe completion of the project. The building was completed June 30, 2018. Ming’s depreciatesthe building using the straight-line method over 35 years, with estimated residual value of$330,000.1. Journalize transactions for the following (explanations are not required):a. Purchase of the landb. All the costs chargeable to the building in a single entryc. Depreciation on the building for 20182. Report Ming’s plant assets on the company’s balance sheet at December 31, 2018.3. What will Ming’s income statement for the year ended December 31, 2018, report for…arrow_forwardPLEASE SHOW SOLUTION IN GOOD ACCOUNTING FORM. 5. Crest Corporation established its Poblacion branch in 2019. Merchandise costing P120,000 is shipped to this branch. During the initial year, the home office acquires an equipment for P80,000 to be carried in the branch books, and the branch maintains physical possession and use. The equipment has a useful life of 4 years. The branch sells 60 percent of the inventory for P100,800 on account and subsequently collected half of the amount. The branch remits 80 percent in cash to the Home Office. What is the correct Home Office account balance on the records of the branch?arrow_forwardErika Company operates a customer loyalty program. The entity grants loyalty points for goods purchased. The loyalty points can be used by the customers in exchange for goods of the entity. The points have no expiry date. During 2020, the entity issued 50,000 award credits and expects that 80% of these award credits shall be redeemed. The fair value of the award credits granted is reliably measured at P2,000,000. In 2020, the entity sold goods to customers for a total consideration of P9,000,000 based on stand-alone selling price. The award credits redeemed and the total award credits expected to be redeemed each year are as follows: Redeemed Expected to be Redeemed 2020 15,000 80% 2021 7,950 85% 2022 2,550 85% 2023 15,000 90% Required: Prepare journal entries from 2020 to 2023.arrow_forward
- You have recently been hired as an Accountant for Arizona Corp., a manufacturer of equipment. Arizona follows ASPE but is considering becoming a public company in the next year. Arizona provides a 2 year warranty on its equipment sales and you are examining whether to treat the warranty as a Service-type or Assurance-type warranty for accounting purposes. Revenue would be realized on a straight-line basis if the Service-type approach is followed. Your research has uncovered the following data for 2020: Sales 50 units at $7,500 each (for simplicity assume all are cash sales and occur on January 1) Estimated warranty costs $700 per unit Actual 2020 costs incurred $25,000 Fair value of warranty $800 per unit a) For both the Service-type and Assurance-type approaches, prepare all necessary journal entries for 2020 b) Which approach is preferable? Support your conclusion with applicable account balancesarrow_forwardConsider the following situations and determine (1) which type of liability should be recognized (specific account), and (2) how much should be recognized in the current period (year). A business depreciates a building with a book value of $12,000, using straight-line depreciation, no salvage value, and a remaining useful life of six years. An organization has a line of credit with a supplier. The company purchases $35,500 worth of inventory on credit. Terms of purchase are 3/20, n/60. An employee earns $1,000 in pay and the employer withholds $46 for federal income tax. A customer pays $4,000 in advance for legal services. The lawyer has previously recognized 30% of the services as revenue. The remainder is outstanding.arrow_forward(Learning Objectives 1, 3, 8: Report plant assets, depreciation, and investing cashflows) On January 1, 2018, Little City Bar & Grill purchased a building, paying $58,000 cashand signing a $110,000 note payable. The company paid another $62,000 to remodel thebuilding. Furniture and fixtures cost $55,000, and dishes and supplies—a current asset—wereobtained for $9,400. All expenditures were for cash. Assume that all of these expendituresoccurred on January 1, 2018.Little City is depreciating the building over 25 years using the straight-line method, with anestimated residual value of $51,000. The furniture and fixtures will be replaced at the end of fiveyears and are being depreciated using the double-declining-balance method, with a residual valueof zero. At the end of the first year, the company still had dishes and supplies worth $1,300.Show what the company reported for supplies, plant assets, and cash flows at the end of thefirst year on its■ income statement,■ balance sheet,…arrow_forward
- Sunland Company self-insures its property for fire and storm damage. If the company were to obtain insurance on the property, it would cost them $1970000 per year. The company estimates that on average it will incur losses of $1610000 per year. During 2021, $705000 worth of losses were sustained. How much total expense and/or loss should be recognized by Sunland Company for 2021?arrow_forwardLearning Objectives 1, 3, 8: Report plant assets, depreciation, and investing cashflows) On January 1, 2018, Black Iron Bar & Grill purchased a building, paying $56,000cash and signing a $101,000 note payable. The company paid another $60,000 to remodel thebuilding. Furniture and fixtures cost $51,000, and dishes and supplies—a current asset—wereobtained for $9,600. All expenditures were for cash. Assume that all of these expendituresoccurred on January 1, 2018.Black Iron is depreciating the building over 25 years using the straight-line method, with anestimated residual value of $52,000. The furniture and fixtures will be replaced at the end of fiveyears and are being depreciated using the double-declining-balance method, with a residual valueof zero. At the end of the first year, the company still had dishes and supplies worth $1,600.Show what the company reported for supplies, plant assets, and cash flows at the end of thefirst year on its■ income statement,■ balance sheet, and■…arrow_forwardThe amount of qualified education expenses used to calculate the lifetime learning credit is $2500 $4000 $15,000 $16,500arrow_forward
- Top Sound International designs and sells high-end stereo equipment for auto and home use. Engineers notified management in December 2021 of a circuit flaw in an amplifier that poses a potential fire hazard. Further investigation indicates that a product recall is probable estimated to cost the company $4 million. The fiscal year ends on December 31.Required:1. Should this contingent liability be reported, disclosed in a note only, or neither? Explain.2. What loss, if any, should Top Sound report in its 2021 income statement?3. What liability, if any, should Top Sound report in its 2021 balance sheet?4. What entry, if any, should be recorded?arrow_forwardWhich statement about the education credit is true A- only four-year universities are elegible institutions for the lifetime credit B- An eligible individual for the lifetime learning credit cannot be enrolled part time C-An elegible individual for the American opportunity tax credit may have a felony drug conviction D-A portion of the American opportunity tax credit (AORC) is a refundable creditarrow_forwardJares Investments GlobalLimited is a listed company which manufactures stationery products. The company’s profit before tax for the year ended 31 December 2020is GH¢16·3m and total assets as at that date are GH¢66·8m. You are an audit supervisor of Jeremiah& Associateand you are currently finalizing the audit program for the year-end audit of your existing client Jares Investments Global Limited. You attended a meeting with your audit manager where the following matters were discussed: Trade payables and accruals Jares Investments Global Limitedpurchases its raw materials from a large number of suppliers. The company’s policy is to close the purchase ledger just after the year end and the financial controller is responsible for identifying goods which were received pre year-end but for which no invoice has yet been received. An accrual is calculated for goods received but not yet invoiced (GRN) and is included within trade payables and accruals. The audit strategy has identified a…arrow_forward