ACC 306 Week 1

ACC 306 Week 1 Quiz

Assignments

E1321 - Disclosures of liabilities ? LO1 through LO6

Required:

Indicate (by letter) the way each of the items listed below should be reported in a

balance sheet at December 31, 2011.

E1322 - Woodmier Lawn Products - Warranty expense; change in estimate ? LO5 LO6

Woodmier Lawn Products introduced a new line of commercial sprinklers in 2010 that carry a one-year warranty against manufacturers defects. Because this was the first product for which the company offered a warranty, trade publications were consulted to determine the experience of others in the industry. Based on that experience, warranty costs were expected to approximate 2% of sales. Sales of the sprinklers in 2010 were $2.5 million. Accordingly, the following entries relating to the contingency for warranty costs were recorded during the first year of selling the product:

Accrued liability and expense

Warranty expense (2% $2,500,000) ...........................50,000.................................

Estimated warranty liability .............................................................50,000........

Actual expenditures (summary entry)

Estimated warranty liability ............................................23,000..........................

Cash, wages payable, parts and supplies, etc. ...................................23,000

In late 2011, the companys claims experience was evaluated and it was determined that claims were far more than expected3% of sales rather than 2%.

Required:

1. Assuming sales of the sprinklers in 2011 were $3.6 million and warranty expenditures in 2011 totaled $88,000, prepare any journal entries related to the warranty.

2.Assuming sales of the sprinklers were discontinued after 2010, prepare any journal entry(s) in 2011 related to the warranty.

P 121 - Fuzzy Monkey Technologies, Inc. - Securities held- to-maturity; bond investment; effective interest ? LO1

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $80 million of 8% bonds, dated January 1, on January 1, 2011. Management has the positive intent and ability to hold the bonds until maturity. For bonds of similar risk and maturity the market yield was 10%. The price paid for the bonds was $66 million. Interest is received semiannually on June 30 and December 31. Due to changing market conditions, the fair value of the bonds at December 31, 2011, was $70 million.

Required:

1.Prepare the journal entry to record Fuzzy Monkeys investment on January 1, 2011.

2.Prepare the journal entry by Fuzzy Monkey to record interest on June 30, 2011 (at the effective rate).

3.Prepare the journal entries by Fuzzy Monkey to record interest on December 31, 2011 (at the effective rate).

1. At what amount will Fuzzy Monkey report its investment in the December 31, 2011, balance sheet? Why?

2. How would Fuzzy Monkeys 2011 statement of cash flows be affected by this investment?

P 127 - Amalgamated General Corporation - Securities held-to- maturity, securities available for sale, and trading securities ? LO1 LO2 LO3 (also see included excel file)

Amalgamated General Corporation is a consulting firm that also offers financial services through its credit division. From time to time the company buys and sells securities intending to earn profits on short-term differences in price. The following selected transactions relate to Amalgamateds investment activities during the last quarter of 2011 and the first month of 2012. The only securities held by Amalgamated at October 1 were $30 million of 10% bonds of Kansas Abstractors, Inc., purchased on May 1 at face value. The companys fiscal year ends on December 31.

2011

Oct. 18 Purchased 2 million preferred shares of Millwork Ventures Company for $58 million as a speculative investment to be sold under suitable circumstances.

    31  Received semiannual interest of $1.5 million from the Kansas Abstractors bonds. 

Nov. 1Purchased 10% bonds of Holistic Entertainment Enterprises at their $18 million face value, to be held until they mature in 2018. Semiannual interest is payable April 30 and October 31.

Sold the Kansas Abstractors bonds for $28 million because rising interest rates are expected to cause their fair value to continue to fall.

Dec. 1Purchased 12% bonds of Household Plastics Corporation at their $60 million face value, to be held until they mature in 2028. Semiannual interest is payable May 31 and November 30.

     20   Purchased U. S. Treasury bonds for $5.6 million as trading securities, hoping to earn profits on short-term differences in prices.

     21   Purchased 4 million common shares of NXS Corporation for $44 million as trading securities, hoping to earn profits on short-term differences in prices. 

     23   Sold the Treasury bonds for $5.7 million.

     29   Received cash dividends of $3 million from the Millwork Ventures Company preferred shares.

     31   Recorded any necessary adjusting entry(s) and closing entries relating to the investments. The market price of the Millwork Ventures Company preferred stock was $27.50 per share and $11.50 per share for the NXS Corporation common. The fair values of the bond investments were $58.7 million for Household Plastics Corporation and $16.7 million for Holistic Entertainment Enterprises.

2012

Jan. 7Sold the NXS Corporation common shares for $43 million.

Required:

Prepare the appropriate journal entry for each transaction or event.

P1210 - Runyan Bakery - Fair value option; equity method investments ? LO2 LO4 LO7

On January 4, 2011, Runyan Bakery paid $324 million for 10 million shares of Lavery Labeling Company common stock. The investment represents a 30% interest in the net assets of Lavery and gave Runyan the ability to exercise significant influence over Laverys operations. Runyan chose the fair value option to account for this investment. Runyan received dividends of $2.00 per share on December 15, 2011, and Lavery reported net income of $160 million for the year ended December 31, 2011. The market value of Laverys common stock at December 31, 2011, was $31 per share. On the purchase date, the book value of Laverys net assets was $800 million and:

a.The fair value of Laverys depreciable assets, with an average remaining useful life of six years, exceeded their book value by $80 million.

b.The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill.

Required:

1.Prepare all appropriate journal entries related to the investment during 2011, assuming Runyan accounts for this investment under the fair value option and accounts for the Lavery investment in a manner similar to what they would use for trading securities.

2.Prepare the journal entries required by Runyan, assuming that the 10 million shares represents a 10% interest in the net assets of Lavery rather than a 30% interest.

P1214 Classifying investments ? LO1 through LO5

Required:

Indicate (by letter) the way each of the investments listed below most likely should be accounted for based on the information provided.

P136 - Eastern Manufacturing - Various contingencies ? LO5 LO6

Eastern Manufacturing is involved with several situations that possibly involve contingencies. Each is described below. Easterns fiscal year ends December 31, and the 2011 financial statements are issued on March 15, 2012.

a. Eastern is involved in a lawsuit resulting from a dispute with a supplier. On February 3, 2012, judgment was rendered against Eastern in the amount of $107 million plus interest, a total of $122 million. Eastern plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the company.

b. In November 2010, the State of Nevada filed suit against Eastern, seeking civil penalties and injunctive relief for violations of environmental laws regulating hazardous waste. On January 12, 2012, Eastern reached a settlement with state authorities. Based upon discussions with legal counsel, the Company feels it is probable that $140 million will be required to cover the cost of violations. Eastern believes that the ultimate settlement of this claim will not have a material adverse effect on the company.

c. Eastern is the plaintiff in a $200 million lawsuit filed against United Steel for damages due to lost profits from rejected contracts and for unpaid receivables. The case is in final appeal and legal counsel advises that it is probable that Eastern will prevail and be awarded $100 million.

d. At March 15, 2012, the Environmental Protection Agency is in the process of investigating possible soil contamination at various locations of several companies including Eastern. The EPA has not yet proposed a penalty assessment. Management feels an assessment is reasonably possible, and if an assessment is made an unfavorable settlement of up to $33 million is reasonably possible.

Required:

1.Determine the appropriate means of reporting each situation. Explain your reasoning.

1. Prepare any necessary journal entries and disclosure notes.

Discussion Questions

P 1213 - Miller Properties - Equity method ? LO5 LO6

On January 2, 2011, Miller Properties paid $19 million for 1 million shares of Marlon Companys 6 million outstanding common shares. Millers CEO became a member of Marlons board of directors during the first quarter of 2011.

The carrying amount of Marlons net assets was $66 million. Miller estimated the fair value of those net as- sets to be the same except for a patent valued at $24 million above cost. The remaining amortization period for the patent is 10 years.

Marlon reported earnings of $12 million and paid dividends of $6 million during 2011. On December 31, 2011, Marlons common stock was trading on the NYSE at $18.50 per share.

Required:

1. When considering whether to account for its investment in Marlon under the equity method, what criteria should Millers management apply?

2. Assume Miller accounts for its investment in Marlon using the equity method. Ignoring income taxes, deter- mine the amounts related to the investment to be reported in its 2011:

a. Income statement.

b. Balance sheet.

c. Statement of cash flows.

Judgment Case 139 - Valleck Corporation - Loss contingency and full disclosure ? LO5 LO6

In the March 2012 meeting of Valleck Corporations board of directors, a question arose as to the way a possible obligation should be disclosed in the forthcoming financial statements for the year ended December 31. A veteran board member brought to the meeting a draft of a disclosure note that had been prepared by the controllers office for inclusion in the annual report. Here is the note:

On May 9, 2011, the United States Environmental Protection Agency (EPA) issued a Notice of Violation (NOV) to Valleck alleging violations of the Clean Air Act. Subsequently, in June 2011, the EPA commenced a civil action with respect to the foregoing violation seeking civil penalties of approximately $853,000. The EPA alleges that Valleck exceeded applicable volatile organic substance emission limits. The Company estimates that the cost to achieve compliance will be $190,000; in addition the Company expects to settle the EPA lawsuit for a civil penalty of $205,000 which will be paid in 2014.

Where did we get the $205,000 figure? he asked. On being informed that this is the amount negotiated last month by company attorneys with the EPA, the director inquires, Arent we supposed to report a liability for that in addition to the note?

Required:

Explain whether Valleck should report a liability in addition to the note. Why or why not? For full disclosure, should anything be added to the disclosure note itself?