Determine if a liability should be recorded in each of thefollowing cases involv

Question

Determine if a liability should be recorded in each of thefollowing cases involving the Soft- Wear Manufacturing Company. Ifthere is no liability, explain how the item should be recorded.

A.     The company guarantees to repair orreplace any of its products that are defective.

B.     The company estimates that somecustomers will not pay for merchandise purchased on credit.

C.     The company obtains an asset andsigns a lease that extends for one- third of the useful life of theasset.

D.     The company is being investigated forpotential pollution problems by the Environmental ProtectionAgency. The company’s engineers believe it is likely that thecompany will be held responsible for an expensive cleanupactivity.

E.      The company has issued bondsthat are maturing at the end of the current month.

F.      The company is being sued by anunhappy customer. The case has not yet come to court.

G.     The company has declared a 20% stockdividend.

H.     The company has declared a $ 0.25cash dividend to be paid on all outstanding shares.

I.        The preferred stockis cumulative and dividends have not been paid for three years.

J.       The company has anoncontrolling interest of 3%.

K.    The company has bonds outstanding that areconvertible into common stock. The company’s accountantsbelieve that bond holders are likely to convert their bonds becausethe company has performed exceptionally well this year.

L.      Stock options have been issuedto the company’s executives. The options have not yet beenexercised.

Explanation / Answer

A Liability should be recorded B No Liability . Only Provision C No Liability . Only Rent Expense D Contingent Liability E Liability should be recorded F No Liability . G A Current Liability should be recorded H A Current Liability should be recorded I Liability should be recorded J No Liability . K No Liability . L Liability should be recorded

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