Assessment 4: Liabilities, Owners Equity, Warranty Expense Estimates, and Issuance of Securities

 

Complete an assessment with two main sections, which address (1) liability and owner’s equity and (2) warranty expense and issuance of securities.

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Introduction

Note: An accounting cycle requires specific steps that need to be executed in a sequence. The assessments in this course are presented in sequence and must be completed in order.

Competencies Measured

By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria:

    • Competency 2: Examine the role of accounting as an information system.

      Analyze current liabilities.
      Analyze long-term debt.
      Apply accounting procedures to equity transactions.

    • Competency 4: Analyze financial liabilities and equities of an enterprise.

      Describe why a company should accrue warranty expense.
      Identify the purpose of a securities offering announcement.
      Describe the entry to record the sale of a security and its impact on future interest expense.
      Explain why a security is priced at a value other than par.

    • Competency 5: Communicate in a manner that is professional and consistent with expectations for professionals in the field of accounting.

      Communicate in a manner that is professional and consistent with expectations for professionals in the field of accounting.

Preparation

  • Assessment 4 Template [DOC].
  • Assessment 4 Liabilities and Owners’ Equity Data [DOC].

Overview

Note: Do not proceed with this assessment until you have reviewed faculty feedback on Assessment 3.

This assessment has two sections:

  1. Liabilities and Owner’s Equity.
  2. Warranty Expense Estimate and Issuance of Securities.

Section 1: Liabilities and Owner’s Equity

This section of the assessment has three parts. Use the Assessment 4 Liabilities and Owners’ Equity Data document for the information you need to complete the three parts, and record your answers in the Assessment 4 Template. Both documents are linked in the Resources under the Required Resources heading. Submit the completed template.

Scenario

As a practitioner, your workload can vary drastically from week to week, and sometimes on a daily basis. A can-do attitude is valued, along with your knowledge and work ethic. So, you dig in to a new stack of files left on your desk with a note instructing you to provide answers by end of day.

Part 1: Current Liabilities

Complete Part 1 in the Assessment 4 Liabilities and Owners’ Equity Data document.

Part 2: Long-Term Liabilities

Complete Part 2 in the Assessment 4 Liabilities and Owners’ Equity Data document.

Part 3: Equity Transactions

Complete Part 3 in the Assessment 4 Liabilities and Owners’ Equity Data document.

Section 2: Warranty Expense Estimate and Issuance of Securities

This section has two parts. Complete both parts as described below.

Part 1: Warranty Expense Estimate

Greg Johnson, after completing the adjusting for his new company, Poly-Fix, was called to meet with the company controller to discuss his proposed entries. Greg assumed that the controller was questioning his efforts as he was asked to bring his notes, calculations, and supporting documentation. He soon learned that his assumption was incorrect and that his boss wanted him to reconsider one of the adjusting entries for an estimated expense.

Poly-Fix is a new company, specializing in commercial fasteners. Their products have a long-term warranty against manufacturing defects. Greg’s boss feels that 3 percent of sales is too high for their warranty expense estimate. This is a new product that has yet to be tested, and the company president is under pressure from their lenders to meet projected income and profit levels.

In a 2-3-page Word document, address the following:

  • Should Greg change his warranty expense estimate? Why or why not?
  • Why should a company accrue warranty expense? Explain.
  • Who might be impacted by a decision to revise the estimate? How might they be impacted?
  • What is the impact of revising a warranty expense estimate? Explain.
Additional Requirements

Part 1 of Section 2 should meet the following requirements:

  • Written communication: Written communication should be clear, well-organized, and support a central idea, with no technical writing errors, as expected of a business professional.
  • References: References and citations should be formatted using current APA guidelines for style and formatting.
  • Length: 2-3 typed, double-spaced pages.
  • Font and font size: Times New Roman, 12-point.
Part 2: Issuance of Securities

The following announcement appeared in the July 15, 2018, issue of the Wall Avenue Financial Journal:

_________________________________________________________________________
This announcement is not an offer of securities for sale or an offer to buy securities.
New Issue, July 15, 2018 $950,000,00
CRUDE OIL & GAS, INC.
5.75% Debentures Due July 1, 2033
Price 99.76%
Plus accrued interest if any from the date of issuance
Copies of the prospectus and the related prospectus supplement may be obtained from such
of the undersigned as may legally offer these securities under applicable securities laws.
Kermit Jeffers & Co. Inc. / Banks Bros. & Co. \ William Stork & Co.
_________________________________________________________________________
In a 2-3-page Word document, address the following:

  • What is the purpose of this announcement? Identify the purpose of a securities offering announcement.
  • Why are the securities being priced at 99.76 percent? Explain why a security is priced at a value other than par.
  • How will Crude Oil & Gas be recorded in this sale of securities?
  • How will this impact its future interest expense entries?
  • How would you describe the entry to record the sale of a security and its impact on future interest expense?

Additional Requirements

Part 2 of Section 2 should meet the following requirements:

    Written communication: Written communication should be clear, well-organized, and support a central idea, with no technical writing errors, as expected of a business professional.
    References: References and citations should be formatted using current APA guidelines for style and formatting.

  • Length of paper: 2-3-typed, double-spaced pages.
  • Font and font size: Times New Roman, 12-point.

Competencies Measured
By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria:
Competency 2: Examine the role of accounting as an information system.

Analyze current liabilities.
Analyze long-term debt.
Apply accounting procedures to equity transactions.

Competency 4: Analyze financial liabilities and equities of an enterprise.

Describe why a company should accrue warranty expense.
Identify the purpose of a securities offering announcement.
Describe the entry to record the sale of a security and its impact on future interest expense.
Explain why a security is priced at a value other than par.

Competency 5: Communicate in a manner that is professional and consistent with expectations for professionals in the field of accounting.

Communicate in a manner that is professional and consistent with expectations for professionals in the field of accounting.

Assessment 4 Liabilities and Owners’ Equity Data

Record your answers to the following in the Assessment 4 Template for submission. Where appropriate, show all calculations leading to the final solution.

Part

1

: Current Liabilities

A publishing company called Lil Tykes, Inc is preparing its financial statements for its year ending December 31, 2018. They are not certain what the proper accounting treatments are for the following situations, they have asked your group to consult and provide the appropriate accounting treatment.

Provide the journal entry or and an explanation of why an entry should not be made as of December 31, 2018. Provide calculations for the final solution when appropriate.

a) Lil Tykes offers 1-year, 2-year, or 3-year subscriptions to a number of magazines. Payment for subscriptions are collected in advance and credited to the magazine subscriptions collected. The balance of this account was $1,250,000 on December 31, 2018. On December 31, 2018, subscriptions that are outstanding and expire are as follows.

Expire in 2019 — $350,000

Expire in 2020 — 300,000

Expire in 2021 — 450,000

b) Lil Tykes made the decision on January 2, 2018, to become self-insured and no longer carry collision, fire, and theft coverage on their delivery vehicles. For 2017 the actual losses for delivery expense were $40,000. The premium paid in 2016 for the coverage was $50,000. The controller believes that a self-insurance reserve should be set up by recording a debit of $10,000 to delivery expense and a credit of $10,000 to the self-insurance reserve.

c) On July 1, 2018, an author filed a suit against Lil Tykes for breach of contract, seeking damages of $950,000. Their legal counsel has predicted an unfavorable outcome and estimates that the court may award the plaintiff between $275,000 and $575,000, but it is impossible to determine a more definitive damage amount within that range.

d) A competitor filed suit against Lil Tykes in December 2018 for industrial espionage, seeking damages of $450,000. Management and counsel have concluded that damages will most likely be awarded to the plaintiff. The amount of damages that will be rewarded cannot be reasonably estimated.

Part 2: Long-Term Liabilities

Presented below are four independent situations.

a) On March 1, 2018, Jenkins Co. issued at 94 plus accrued interest $9,000,000, 9% bonds. The bonds are dated January 1, 2018, and pay interest semiannually on July 1 and January 1. In addition, Jenkins Co. incurred $59,400 of bond issuance costs. Compute the net amount of cash received by Jenkins Co. as a result of the issuance of these bonds.

b) On January 1, 2018, Redwood Co. issued 9% bonds with a face value of $5,400,000 for $5,068,224 to yield 10%. The bonds are dated January 1, 2018, and pay interest annually. What amount is reported as bond discount on the issue date?

c) Crenshaw Building Supply Co. has a number of long-term bonds outstanding at December 31, 2018. These long-term bonds have the following sinking fund requirements and maturities for the next 6 years.

Sinking Fund
Maturities

2020
$650,000
$250,000

2021
250,000
300,000

2022
250,000
250,000

2023
450,000

2024
450,000
350,000

2025
450,000
250,000

Indicate how this information should be reported in the financial statements at December 31, 2018.

d) In the long-term debt structure of Sarah’s Pies Inc., the following three bonds were reported: mortgage bonds payable $25,000,000; collateral trust bonds $17,500,000; bonds maturing in installments, and bonds secured by plant equipment valued at $2,225,000. Determine the total amount, if any, of debenture bonds outstanding.

Part 3: Equity Transactions

Prepare the stockholders’ equity section for Reynolds Company at December 31, 2016. Show all supporting computations.

Reynolds Company has two classes of capital stock outstanding: 8%, $30 par preferred and $10 par common. At December 31, 2017, the following accounts were included in stockholders’ equity.

Preferred Stock, 165,000 shares

$ 4,950,000

Common Stock, 2,200,000 shares

22,000,000

Paid-in Capital in Excess of Par—Preferred

330,000

Paid-in Capital in Excess of Par—Common

45,100,000

Retained Earnings

8,278,600

The following transactions affected stockholders’ equity during 2018.

Jan. 1
30,000 shares of preferred stock issued at $45 per share.

Feb. 1
37,500 shares of common stock issued at $23 per share.

June 1
2-for-1 stock split (par value reduced to $5.00).

July 1
33,000 shares of common treasury stock purchased at $22 per share. Reynolds uses the cost method.

Sept. 15
11,000 shares of treasury stock reissued at $24 per share.

Dec. 31
The preferred dividend is declared, and a common dividend of 40¢ per share is declared.

Dec. 31
Net income is $3,492,5000.

1

Assessment 4

Section

1

Part 1: Current Liabilities

(a)

(b)

(c)

(d)

Part 2: Long-Term Liabilities

(a)

Jenkins Co.

Net amount of cash received

(b)

Redwood Co.

Bond discount on issue late

$

$

(c)

Crenshaw Building Supply Co.

Maturities and sinking fund requirements on long-term debt

for the next five year are as follows:

2020

$

2023

2021

2024

$

2022

$

(d)

Sarah’s Pies Inc.

Part 3: Equity Transactions

REYNOLD’S COMPANY

Stockholders’ Equity

December 31, 2018

1

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