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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Contingencies Greenlaw Inc., a publishing company, is preparing its December 31, 2019, financial statements and must determine the proper accounting treatment for each of the following situations:

  1. 1. Greenlaw sells subscriptions to several magazines for a 1, 2, or 3-year period. Cash receipts from subscribers are credited to Unearned Revenue: Magazine Subscriptions, and this account had a balance of $2,500,000 at December 31, 2019. Outstanding subscriptions at December 31, 2019, expire as follows:

    During 2020—$600,000

    During 2021—$900,000

    During 2022—$400,000

  2. 2. On January 4, 2019, Greenlaw discontinued collision, fire, and theft coverage on its delivery vehicles and became self-insured for these risks. Actual losses of $45,000 during 2019 were charged to delivery expense. The 2018 premium for the discontinued coverage amounted to $100,000, and the controller wants to set up a reserve for self-insurance by a debit to Delivery Expense of $55,000 and a credit to Reserve for Self-Insurance of $55,000.
  3. 3. A suit for breach of contract seeking damages of $1,000,000 was filed by an author against Greenlaw on July 3, 2019. The company’s legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the court’s award to the plaintiff is in the range between $100,000 and $500,000. No amount within this range is a better estimate of potential damages than any other amount.
  4. 4. During December 2019 a competitor company filed suit against Greenlaw for industrial espionage claiming $2,000,000 in damages. In the opinion of management and company counsel, it is reasonably possible that damages will be awarded to the plaintiff, and the amount of potential damages awarded to the plaintiff is estimated to be $1,500,000.

Required:

  1. 1. For each of the preceding situations, prepare the journal entry that should be recorded as of December 31, 2019, or explain why an entry should not be recorded. Show supporting computations in good form.
  2. 2. How might your answers to the breach of contract litigation and the industrial espionage litigation change if Greenlaw used IFRS?

1.

To determine

Prepare necessary journal entry that must be recorded for the given situations as on December 31 2019 and also provide the  reason for providing entry  for certain situations with appropriate computations.

Explanation

Contingent liability:

This is an uncertain obligation which might be incurred on a future date as a result of any past transaction. So, the companies should provide provision for such uncertain liabilities in the financial statements.

1.

DateAccount Titles and explanationDebit ($)Credit ($)
December 31, 2019Unearned revenue: Magazine subscriptions  (1)600,000 
      Magazine subscriptions  revenue 600,000
 (To record the subscription earned during 2019)  

Table (2)

  • Unearned revenue is a liability and there is a decrease in the value of liability. Hence, debit the unearned revenue by $600,000.
  • Magazine subscription revenue is component of stockholder’s equity and there is an increase in the value revenue. Hence, credit the magazine subscription revenue by $600,000.

2.

To accrue for an expense journal entry is not required as the absences of insurance coverage will not be consider  an asset to be impaired or a liability  to be incurred  on the balance sheet date. Company G must have appropriate retained earnings for self-insurance when the actual cost or losses that are to be charged in appropriation to the retained earnings and not on the part appropriation that a being transferred to the income...

2.

To determine

Explain the manner by which the breach of contract litigation and the industrial espionage litigation change if Company G uses IFRS.

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