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
(1 month warranties)
Cash (800 x $100) 80,000
Estimated warranty obligation 80,000
(2 year extended warranties sold)
Estimated warranty obligation 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