PROBLEM 1

 

Gomez Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2011. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Gomez recall all cans of this paint sold in the last six months. The management of Gomez estimates that this recall would cost between $600,000 and $1,000,000.

 

Part A – What accounting recognition, if any, should be accorded this situation?

 

 

 

 

Part B – How would your answer change to Part A if 70% of the paint cans were sold before 12/31/2011 and the remainder were sold after 12/31/2011 but before the financial statements were issued on 3/5/2012?

 

 

 

 

Part C – How would your answer change to Part A if the health hazard was only alleged (but not yet probable) when the 2011 financial statements were published?

 

 

 

 

 

Part D – How would your answer change to Part A if the company’s financial statements were prepared in accordance with international accounting rules?

 

 

 

 

 

PROBLEM 2

 

Stiner Company has 20 employees who work 8-hour days and are paid hourly. On January 1, 2010, the company began a program of granting its employees 10 days’ paid vacation each year. Vacation days earned in 2010 may first be taken on January 1, 2011. Information relative to these employees is as follows:

 

Hourly

Vacation Days Earned

Vacation Days Used

Year

Wages

by Each Employee

by Each Employee

2010

$12.90

10

0

2011

13.50

10

6

2012

14.20

10

12

 

Stiner has chosen to accrue the liability for compensated absences at the current rates of pay in effect when the compensated time is earned.

 

          What is the amount of the accrued liability for compensated absences that should be reported at December 31, 2010, December 31, 2011, and December 31, 2012?

 

 

 

 

 

 

          What is the amount of the expense for compensated absences that should be reported for 2010, 2011 and 2012?

 

 

 

 

 

 

          Prepare journal entries for 2012

PROBLEM 3

 

 

XYZ is preparing to sell a new product. The product will sell for $4 per unit and costs $3 per unit to manufacture.. As a marketing experiment, they send out two different coupons on 12/31/2009. Coupon A is a $.50 (50 cents) off coupon. Coupon B allows the customer to purchase 3 units at a introductory price of $2.10. The company expects that 10,000 of Coupon A will be used and 20,000 of Coupon B will be used. What liability, if any, should be recorded as of 12/31/2009. Use the definition of a liability from Statement of Financial Accounting Concepts No. 6 to explain your treatment and be sure to show your computations if you conclude that a liability must be recorded.

 

 

 

 

 

 

PROBLEM 4

 

On December 31, 2011, Frye Co. has $5,100,000 of short-term notes payable due on February 14, 2012 On January 10, 2012, Frye arranged a line of credit with County Bank which allows Frye to borrow up to $4,200,000 at one percent above the prime rate for three years. On February 2, 2012, Frye borrowed $3,600,000 from County Bank and used $1,500,000 of existing cash to liquidate the $5,100,000 due on that date. The amount of the short-term notes payable that should be reported as current liabilities on the December 31, 2011 balance sheet which were issued on March 5, 2012 is:

 

 

 

 

 

 

PROBLEM 5

 

Milner Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 3boxtops from Milner Frosted Flakes boxes and $1.00 for “shipping and handling.” The company estimates that 60% of the boxtopswill be redeemed. In 2007, the company sold 775,000 boxes of Frosted Flakes and customers redeemed 330,000 boxtops receiving 110,000 bowls. If the bowls cost Milner Company $2.50 each to purchase and ship, how much liability for outstanding premiums should be recorded at the end of 2007?

 

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