Required: Explain the treatment of the following information. Show all calculati

Question

Required: Explain the treatment of the following information. Show all calculations and which accounts are affected on the balance sheet. (explain any new accounts that must be added to the given balance sheet

a. Walbash has discovered that a product it began manufacturing and selling in 2016

has defective bearings, sometimes causing a wheel to fall off. Walbash has issued

a “recall” notice in newspapers and magazines in which it offers to replace the

bearings. It estimates the cost of $200,000 for these repairs. No lawsuits have

been filed for injury claims, although the company feels that there is a reasonable

possibility that claims may total as high as $2 million.

b. Walbash has an incinerator behind one of its stores which is used to burn

cardboard boxes received in shipments of inventory. The state environmental

protection agency filed suit against the company in August 2016 for air pollution.

Walbash expects to stop using the incinerator and begin recycling. However, its

lawyers believe that it is probable that a fine of between $40,000 and $60,000 will

be levied against the company, although they cannot predict the exact amount.

c. Walbash sold 1000 software packages for $300 each on credit (ignore cost of

goods sold). With each software package, Walbash offered a premium in the form

of a USB drive for the return of one proof of purchase. The offer expires June 30,

2017. The cost of each USB drive is $5 and Walbash estimates that 80% of the

premiums will be redeemed. In 2016, 540 premiums were redeemed.

Walbash Company Balance Sheet December 31,2016 Liabilities Current Liabilities Assets Current Assets Cash Accounts Receivable Less: Allowance for Doubtful Accounts Inventory Sale Securities 5 19,400 4,100 7,200 4,000 S 3,800 Accounts Payable $ 18,500 Accrued Wages 700 17,800 ncome Tax Payable 30,500 Mortgage Payable 4.600 Long Term Liabilities Mortgage Payable Investment 16,000 40,000 Dray Company Bonds 9,000 Bonds Payable Property, Plant & Equipment Building Total Liabilities 5 90700 63.400 21,000 42.400 29,600 13,000 ,00 Stakeholders Equity Equipment Land 12,000 Common Stock 11,000 Additional Paid in Capital Common Preferred Stock Additional Paid in Capital Preferred Retained Earnings Premium on Bond Payable Security for Sale Less: Treasury Stock 14,700 25,700 6,000 2.400 Intangible Assets Patent Less: Amortization Trademarks 8.200 2,300 8,400 37,800 5,900 3,700 4,300 1,100 1,800 Other Assets Prepaid Insurance Sinking Fund 3,600 2,900 7,000 10,000 Notes Receivable Total Assets S 166,200 Total Liabilities & Stakeholders Equity 5 166.200 Contingent Liability SPA Fine (b.) 5 40,000

Explanation / Answer

a. Amt. Of 200,000 will be shown as provision for warrant in the liability side of balance sheet and with respect to claim for injury the same will be shown in notes to accounts as contingent liability.

b. Since it is probable that fine will be levied thus areasonable estimated AMT. Can be shown as provision in the liability side of balancesheet

c. Provision for premium will be recognised in the liability side of balancesheet for remaining AMT. Of products which is 800-540=260x5=1300 in the liability side of balance sheet.

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.