Part 1: Current Liabilities
A publishing company called Lil Tykes, Inc. is preparing its financial statements for its year ending December 31, 2016. 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, 2016. 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 $1,150,000 on December 31, 2016. On December 31, 2016, subscriptions that are outstanding and expire are as follows.
Expire in 2017 - $300,000
Expire in 2018 - 250,000
Expire in 2019 - 400,000
b) Lil Tykes made the decision on January 2, 2016, to become self-insured and no longer carry collision, fire, and theft coverage on their delivery vehicles. For 2015 the actual losses for delivery expense were $30,000. The premium paid in 2014 for the coverage was $45,000. The controller believes that a self-insurance reserve should be set up by recording a debit of $15,000 to delivery expense and a credit of $15,000 to the self-insurance reserve.
c) On July 1, 2016, an author filed a suit against Lil Tykes for breach of contract, seeking damages of $750,000. Their legal counsel has predicted an unfavorable outcome and estimates that the court may award the plaintiff between $225,000 and $525,000, but it is impossible to determine a more definitive damage amount within that range.
d) A competitor filed suit against Lil Tykes in December 2016 for industrial espionage, seeking damages of $350,000. 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, 2016, Jenkins Co. issued at 97 plus accrued interest $7,000,000, 9% bonds. The bonds are dated January 1, 2016, and pay interest semiannually on July 1 and January 1. In addition, Jenkins Co. incurred $54,000 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, 2016, Redwood Co. issued 9% bonds with a face value of $4,500,000 for $4,223,520 to yield 10%. The bonds are dated January 1, 2016, 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, 2017. These long-term bonds have the following sinking fund requirements and maturities for the next 6 years.
Sinking Fund Maturities
2018 $600,000 $200,000
2019 200,000 250,000
2020 200,000 200,000
2021 400,000 -
2022 400,000 300,000
2023 400,000 200,000
Indicate how this information should be reported in the financial statements at December 31, 2017.
d) In the long-term debt structure of Sarah's Pies Inc., the following three bonds were reported: mortgage bonds payable $20,000,000; collateral trust bonds $15,000,000; bonds maturing in installments, secured by plant equipment $2,000,000. 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, 2015, the following accounts were included in stockholders' equity.
Preferred Stock, 150,000 shares $ 4,500,000
Common Stock, 2,000,000 shares 20,000,000
Paid-in Capital in Excess of Par-Preferred 300,000
Paid-in Capital in Excess of Par-Common 41,000,000
Retained Earnings 7,526,000
The following transactions affected stockholders' equity during 2016.
Jan. 1 25,000 shares of preferred stock issued at $42 per share.
Feb. 1 35,000 shares of common stock issued at $20 per share.
June 1 2-for-1 stock split (par value reduced to $5.00).
July 1 30,000 shares of common treasury stock purchased at $19 per share. Reynolds uses the cost method.
Sept. 15 10,000 shares of treasury stock reissued at $21 per share.
Dec. 31 The preferred dividend is declared, and a common dividend of 35¢ per share is declared.
Dec. 31 Net income is $3,175,000.
Attachment:- Template.rar