Ch12 Solutions

Topics: Generally Accepted Accounting Principles, Asset, Balance sheet Pages: 33 (7012 words) Published: July 29, 2014
Chapter 12: Liabilities

Suggested Time
Case 12-1Dry Clean Depot Limited
12-2Darcy Limited
12-3Homebake Incorporated

Assignment12-1Liability issues25
12-2Liability recognition (W*)25
12-3Warranty10
12-4Estimated obligations20
12-5Liability measurement………………………..15
12-6Measurement of estimated liabilities20
12-7Long-term note—borrower and lender35
12-8Note with below-market interest rate35
12-9Debt issuance, fair value25
12-10Bonds—compare effective interest, straight-line45
12-11Bonds—effective interest, straight-line (*W)50
12-12Bond interest30
12-13Bond interest30
12-14Bonds issued between interest dates (*W)40
12-15Bonds—between interest dates; effective interest40
12-16Bonds issued between interest dates35
12-17Upfront fees25
12-18Upfront fees and notes payable25
12-19Borrowing costs25
12-20Borrowing costs25
12-21Retirement—open market purchase25
12-22Bond retirement (W*)30
12-23Bond retirement 45
12-24Bond retirement20
12-25Bond issuance and retirement, accrued interest40
12-26Bond issuance, defeasance40
12-27Bonds, comprehensive40 12-28Foreign exchange20
12-29Foreign exchange (*W)20
12-30Partial statement of cash flow30

*WThe solution to this assignment is on the text Web site and in
the Study Guide. The solution is marked WEB.

Questions

1.The definition of a liability embodies a future sacrifice of assets or services, a present obligation, as a result of a past transaction or event.

2.A financial liability exists when one company has a liability and another entity has a financial asset. Non-financial liabilities are all other liabilities; no corresponding financial asset arises on the books of the counter-party. Examples include liabilities for environmental remediation, lawsuits and warranties. [Other examples are acceptable.] Liabilities must be probable of payment (>50% probability) to be recognized. Amounts are measured at best estimate, which is expected value for large populations and most likely outcome for small populations. Most likely outcome is informed by expected value and cumulative probabilities. If suggested proposals for change are adopted, the liability will be measured at expected value as long as an obligating event takes place.

3.Accounting for the lawsuit is complicated at this stage because the company and/or the lawyer would be unwilling to admit in print (i.e., in the financial statements) that they would settle the lawsuit, and at what amount. This might provide too much information to the plaintiff. Note disclosure of the lawsuit, in general terms, is the likely outcome, although an accrual for $150,000 would be made if the company were to share this information with its accountants. This is the ethically appropriate outcome. If the accrual is made, separate disclosure would be minimal so its treatment would not be obvious to the plaintiff.

4.A purchase order is an executory contract, and is not a liability until the other party performs its obligations under the contract. That is, the amount becomes a liability when the goods are delivered, but not until then. Some liability would be recognized if the contract became an onerous contact. This would happen if the fair value of the goods were to fall below $10 per case. A liability would be recognized for the amount of the loss because that amount has no economic value.

5. No liability will be recorded for coupons that involve a modest decrease in purchase price. The only result of the coupon program is that gross profit will be lower in the period in which the coupons are used. A liability would only be recorded if the coupon program resulted in cash being paid out, or products sold at less than cost. Here, it is assumed that the $14 regular price...
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