l T-Mobile 17:59 SERIAL PROBLEM: KATE\'S CARDS (Note: This is a continuation of

ID: 2524014 • Letter: L

Question

l T-Mobile 17:59 SERIAL PROBLEM: KATE'S CARDS (Note: This is a continuation of the Serial Problem: Kate's Cards from Chapters 1 through 9.) SPI0 Recall that Kate previously obtained a $15,000 bank loan, signing a note payable, on November 30. The note required semiannual interest payments at the rate of six percent. The entire principal balance was due two years from the origination date of the note. Kate has been accruing interest on a monthly basis in the amount of $75. Kate would like to know how she should record the interest in May, the month she makes the first interest payment. She is unsure how much expense will need to be recorded in May. The upcoming interest payment is really not Kate's main concern right now. She was just notified by a lawyer that she is being sued for copyright infringement. Mega Cards Incorporated, one of the largest greeting card companies, believes that one of Kate's designs is too similar to one of Mega's Chapter 10 Accounting for Liabilities designs for it to be coincidence, and has, therefore, decided to sue Kate's Cards. Mega has a prior reputation for suing small companies and settling out of court for lesser damages. Kate, however knows that her design is original and that she had never previously seen the Mega design that is the subject of the lawsuit. She has determined to fight the lawsuit, regardless of the cost. She doesn't know, however, how this will affect her financial statements. 1. Record the May journal entry for Kate's first interest payment. How much interest expense is reported in May? How should Kate report the copyright infringement lawsuit in her financial statements? 2.

Explanation / Answer

date

explanation

debit

credit

31-May

interest expense

interest payable (75*5)

375

cash

450

This is the case of contingent liability and if would be recorded if contingency is probable and the amount of the liability can be reasonably estimated. So a journal entry would be passed by debiting the law expense and crediting accrued expenses. But as in the case of Kate, neither the probability of losing the case nor the amount of liability is mentioned, it will be recorded as a footnote in the end of financial statement.