Share
Explore BrainMass

P 9-10 Contingent Liabilities P 10-5 Impact of a Lease

Problem 9-10 Contingent Liabilities
Several items are listed for which the outcome of events is unknown at year-end.
a. A company offers a two-year warranty on sales of new computers. It believes that 4% of the computers will require repairs.
b. The company is involved in a trademark infringement suit. The company's legal experts believe that an award of $500,000 in the company's favor will be made.
c. A company is involved in an environmental cleanup lawsuit. The company's legal counsel believes that the outcome may be unfavorable but has not been able to estimate the costs of the possible loss.
d. A soap manufacturer has included a coupon offer in the Sunday newspaper supplements. The manufacturer estimates that 25% of the 50-cent coupons will be redeemed.
e. A company has been sued by the federal government for price fixing. The company's legal counsel believes that there will be an unfavorable verdict and has made an estimate of the probable loss.
Required
1. Identify which of the items (a) through (e) should be recorded at year-end.
2. Identify which of the items (a) through (e) should not be recorded but should be disclosed in the year-end financial statements.

Problem 10-5 Financial statement Impact of a Lease
On January 1, 2008, Muske Trucking Company leased a semi-tractor and trailer for five years. Annual payments of $28,300 are to be made every December 31 beginning December 31, 2008. Interest expense is based on a rate of 8%. The present value of the minimum lease payments is $113,000 and has been determined to be greater than 90% of the fair market value of the asset on January 1, 2008. Muske uses straight-line depreciation on all assets.
Required
1. Prepare a table similar to Exhibit 10-7 to show the five-year amortization of the lease obligation.
2. Identify and analyze the effect of the lease signing on January 1, 2008.
3. Identify and analyze the effect of all transactions on December 31, 2009 (the second year of the lease).
4. Prepare the balance sheet presentation as of December 31, 2009, for the leased asset and the lease obligation.
Problem 11-13 Effects of Stockholders Equity Transactions on Balance Sheet
The following transactions occurred at Horton INc. during its first year of operation:
a. Issued 100,000 shares of common stock at $5 each; 1,000,000 shares are authorized at $1 par value.
b. Issued 10,000shares of common stock for a building and land. The building was appraised for $20,000, but the value of the land is undeterminable. The stock is selling for $10 on the open market.
c. Purchased 1,000 shares of its own common stock on the open market for $16 per share.
d. Declared a 2-for-1 stock split. The market value of the stock was $37 before the stock split.
e. Reported $180,000 of income for the year.
Required
1. Identify and analyze the effect of each transaction.
2. Prepare the Stockholders Equity section of the balance sheet.
3. Write a paragraph that explains the number of shares of stock issued and outstanding at the end of the year.

Attachments

Solution Preview

Several items are listed for which the outcome of events is unknown at year-end.

a. A company offers a two-year warranty on sales of new computers. It believes that 4% of the computers will require repairs.

The liability is probable, and an estimate is available. Record at year end.

b. The company is involved in a trademark infringement suit. The company's legal experts believe that an award of $500,000 in the ...

Solution Summary

Your tutorial gives you the reason for recording or not recording the liabilities and provides schedules to help you organize the data and respond to the requirements. Instructional notes are added to the spreadsheets to guide you.

$2.19