Intermediate Accounting Problem Set
PROBLEM SET 1 - SOLUTION
PROBLEM 1
Part A - Record a liability (and expense) for $800,000 in 2009. Since the loss has been recorded, we don’t have to disclose it. However, if the possible loss exceeds $800,000 (or if the probable loss was a range and we only recorded the minimum) then we need to disclose.
Part B - If only 80% of the cans were sold before 12/31/09, then record a liability of $640,000. The recall of the cans sold in 2010 would be disclosed as a subsequent event.
Part C - Disclose the contingent liability
PROBLEM 2
Note that daily rates are:
2010: 12.90 * 8 = 103.20
2011: 13.50 * 8 = 108.00
2012: 14.20 * 8 = 113.60
Liability
Expense
2010
10 * 20 * 103.20 = 20,640
10 * 20 * 103.20 = 20,640
2011
5 * 20 * 103.20 +
10* 20 * 108 = 31,920
10 * 20 * 108 +
5 * 20 * (108 - 103.2) = 22,080
2012
2 * 20 * 108 +
10 * 20 * 113.60 = 27,040
10 * 20 * 113.6 +
5* 20 * (113.6 - 103.2) +
8 * 20 * (113.6 - 108) = 24,656
Proof for 2011: Cash paid = 5 * 20 * 108 = 10,800
Ending Liability for 2011 = 20,640 - 10,800 + 22,080 = 31,920
Proof for 2012: Cash paid = 13 * 20 * 113.6 = 29,536
Ending Liability for 2012 = 31,920 - 29,536 + 24,656 = 27,040
Recall that you could use different entries for 2012. Here is one example:
During the year
Wage Expense
29,536
Cash
29,536
13 * 20 * 113.6 = 29,536
12/31/12
Wage Expense
4,880
Vacation Payable
4,880
24,656 - 29,536 = -4,880
Note that the adjusting entry reduces the expense and liability since days paid in 2012 are higher than days earned, thereby reducing what we owe.
PROBLEM 3
Coupon A is not considered a liability since there is no future sacrifice (as defined by accounting). When the coupon is submitted, we will earn less profit, which is a legitimate marketing strategy.
Coupon B is considered a liability since there is a probable future sacrifice, the company is currently obligated, and the issuance of the coupon constitutes a past transaction. The
PROBLEM 1
Part A - Record a liability (and expense) for $800,000 in 2009. Since the loss has been recorded, we don’t have to disclose it. However, if the possible loss exceeds $800,000 (or if the probable loss was a range and we only recorded the minimum) then we need to disclose.
Part B - If only 80% of the cans were sold before 12/31/09, then record a liability of $640,000. The recall of the cans sold in 2010 would be disclosed as a subsequent event.
Part C - Disclose the contingent liability
PROBLEM 2
Note that daily rates are:
2010: 12.90 * 8 = 103.20
2011: 13.50 * 8 = 108.00
2012: 14.20 * 8 = 113.60
Liability
Expense
2010
10 * 20 * 103.20 = 20,640
10 * 20 * 103.20 = 20,640
2011
5 * 20 * 103.20 +
10* 20 * 108 = 31,920
10 * 20 * 108 +
5 * 20 * (108 - 103.2) = 22,080
2012
2 * 20 * 108 +
10 * 20 * 113.60 = 27,040
10 * 20 * 113.6 +
5* 20 * (113.6 - 103.2) +
8 * 20 * (113.6 - 108) = 24,656
Proof for 2011: Cash paid = 5 * 20 * 108 = 10,800
Ending Liability for 2011 = 20,640 - 10,800 + 22,080 = 31,920
Proof for 2012: Cash paid = 13 * 20 * 113.6 = 29,536
Ending Liability for 2012 = 31,920 - 29,536 + 24,656 = 27,040
Recall that you could use different entries for 2012. Here is one example:
During the year
Wage Expense
29,536
Cash
29,536
13 * 20 * 113.6 = 29,536
12/31/12
Wage Expense
4,880
Vacation Payable
4,880
24,656 - 29,536 = -4,880
Note that the adjusting entry reduces the expense and liability since days paid in 2012 are higher than days earned, thereby reducing what we owe.
PROBLEM 3
Coupon A is not considered a liability since there is no future sacrifice (as defined by accounting). When the coupon is submitted, we will earn less profit, which is a legitimate marketing strategy.
Coupon B is considered a liability since there is a probable future sacrifice, the company is currently obligated, and the issuance of the coupon constitutes a past transaction. The