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BUS 251 (83)


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Simon Fraser University
Business Administration
BUS 251
Steve Gibson

9-22 a. The note has a nine-month maturity; therefore the entire amount of the principal, $100,000, should be presented as a current liability. The company should also accrue interest expense for the four month period of $2,667. ($100,000 x 8% x 4/12). This amount would be presented as interest payable in the current liabilities section of the statement of financial position. b. The current portion of the debt – $25,000 – would be reported as a current liability. The remainder – $125,000 – would continue to be reported as long term. c. 1. When the tickets are sold, all the revenue should be deferred, since the team still has an obligation to play the game before the revenue can be considered earned. 2. At the end of 2011, the team has yet to play 12 out of 20 games, (60%) therefore 60% of the revenues received for the tickets would be classified as unearned revenue on the statement of financial position – $600,000. ($500 x 2000 x 60%) d. The company must record a liability for the amounts related to the deposits, since these amounts will be refunded to the customers. Assuming there was no balance in the account at the beginning of the year, the current liability would be $10,000. e. The company should record a warranty liability of $15,000 (10,000 x 3% x $50). If the $7,000 which was spent during the year related to the current year’s sales, then this amount would be deducted from the liability which was set up. The balance at the end of the year would be $8,000. f. One could argue that since there has been a judgement, a liability should be recorded. However, one of the criteria for a contingent liability – that a transfer of assets will take place to satisfy an existing obligation – does not exist. Since the lawyers are confident that the award will not take place, note disclosure of the situation would be sufficient. 9-24 a. Warranty expense 40,000 Estimated warranty obligation 40,000 (1 month warranties) Estimated warranty obligation 36,000 Cash 36,000 (1 month warranties) Cash (800 x $100) 80,000 Estimated warranty obligation 80,000 (2 year extended warranties sold) Estimated warranty obligation 31,000 Cash 31,000 (2 year extended warranties) b. Computers Galore should classify the one-month warranty obligations as current liabilities, because these obligations are expected to require the use of current assets and expire within one year. Regarding the two-year warranties, part of this obligation is current and part is long-term, depending upon when the computers tend to require repairs. Based on past experience, Computers Galore might be able to estimate the portion of the extended warranty obligation that will require current resources, and the portion that will not be claimed within the upcoming year. If such an estimate cannot be made, the principle of conservatism indicates that the entire obligation should be classified as current. c. If the actual warranty costs incurred by Computers Galore are less than the amount collected
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