c. The liability might have grown for a number of possible reasons.
Often the estimated warranty liability will increase if the underlying product sales are also increasing, as was the case for Ford during this time. Alternatively, Ford’s actual claims experience might be declining. If the percent of sales estimate remained unchanged, this would cause the liability to potentially increase. This partially explains the increase, since only $12,000 million in claims were assumed to be paid, while the current estimated claims payable was $13,605 million at December 31, 2001. Lastly, Ford could be increasing its estimated warranty claims expense as a percent of current period sales.
Ex. 11–9
a. Damage Awards and Fines ............................................. EPA Fines Payable................................................ Litigation Claims Payable ....................................
670,000
390,000 280,000
Note to Instructors: The ―damage awards and fines‖ would be disclosed on the income statement under ―other expenses.‖
b. The company experienced a hazardous materials spill at one of its
plants during the previous period. This spill has resulted in a number of lawsuits to which the company is a party. The Environmental Protection Agency (EPA) has fined the company $390,000, which the company is contesting in court. Although the company does not admit fault, legal counsel believes that the fine payment is probable. In addition, an employee has sued the company. A $280,000 out-of-court settlement has been reached with the employee. The EPA fine and out-of-court settlement have been accrued. There is one other outstanding lawsuit related to this incident. Counsel does not believe that the lawsuit has merit. Other lawsuits and unknown liabilities may arise from this incident.
Ex. 11–10
a. Dec.
b. Jan.
31 Pension Expense .......................................... Unfunded Pension Liability .................... 15 Unfunded Pension Liability ..........................
Cash
315,000
315,000
315,000
315,000
Ex. 11–11
a. Quick Ratio =
Quick Assets
Current Liabilities$530,000 ? $350,000 = 1.10
$800,000$356,000 ? $400,000 = 0.84
$900,000
December 31, 2005:
December 31, 2006:
b. The quick ratio has been decreased between the two balance sheet dates. The major reason is a significant increase in inventory. Cash also declined, possibly to purchase the inventory. As a result, quick assets actually declined, while the current liabilities increased. While the quick ratio for December 31, 2006, is below 1.0, it is not yet at an alarming level. However, the trend suggests that the firm’s current asset (working capital) management should be watched closely.
Ex. 12–1
1st Year $ — 140,000
2nd Year $ 40,000
3rd Year 4th Year 5th Year $ 80,000 $ 120,000
a. Total dividend declared
$
Preferred dividend (current) $ 25,000 $ 25,000 Preferred dividend in arrears (from year 1) b. Total preferred dividends
$ 25,000 Preferred shares outstanding
÷ 25,000 Preferred dividend per share
$ 1.00
$ 25,000 $ 25,000 $ 25,000
15,000 $ 40,000 ÷ 25,000 $ 1.60 10,000 —
$ 35,000 $ 25,000÷ 25,000 ÷ 25,000$ 1.40 $ 1.00 —
Dividend for common shares (a. – b.) $ $115,000 Common shares outstanding ÷250,000 Common dividend per share $ 0.46 —
$ 45,000 $ 95,000÷ 250,000 ÷ 250,000$ 0.18 $ 0.38
Ex. 12–2
a. July 7 Cash ............................................................... 1,600,000
Common Stock ........................................ Paid-In Capital in Excess of Par—
Common Stock ........................................
Oct. 20 Cash ............................................................... 1,800,000
Preferred Stock ........................................
Paid-In Capital in Excess of Par—
Preferred Stock ........................................
b.
$3,400,000 ($1,600,000 + $1,800,000)
Ex. 12–3
Aug. 29 Land ..................................................... 280,000
Common Stock ...............................................
Paid-In Capital in Excess of Par ....................
1,000,000 600,000 1,500,000 300,000
150,000 130,000
Ex. 12–4
a. Cash ..................................................................... 50,000 Common Stock .....................................................
b. Organizational Expenses ........................................... 2,000
Common Stock .....................................................
Cash ..................................................................... 12,000 Common Stock .....................................................
c. Land ................................................................... 60,000 Building ............................................................................ 200,000
Interest Payable* ................................................... Mortgage Note Payable ........................................
Common Stock .....................................................
*An acceptable alternative would be to credit Interest Expense.
Ex. 12–5
Buildings ............................................................................... 80,000
Land ....................................................................................... 45,000
Preferred Stock ................................................................
Paid-In Capital in Excess of Par— Preferred Stock ................................................................
Cash ....................................................................................... 475,000
Common Stock ................................................................
Paid-In Capital in Excess of Par—
Common Stock ................................................................
Ex. 12–6
Jan. 5 Cash .................................................. 1,000,000 Common Stock ...............................................
18 Organizational Expenses .................................... 10,000
Common Stock ...............................................
Feb. 13 Land ....................................................... 50,000
Buildings .............................................................. 280,000 Equipment ............................................................ 120,000
Common Stock ...............................................
Paid-In Capital in Excess of Par— Common Stock ...............................................
Apr. 1 Cash ..................................................... 182,000
50,000 2,000 12,000
900 180,000 79,100
100,000 25,000 400,000 75,000
1,000,000 10,000
425,000 25,000
Preferred Stock .............................................. Paid-In Capital in Excess of Par—
Preferred Stock ..............................................
175,000 7,000
Ex. 12–7
a. June
1 Treasury Stock .............................................. Cash.......................................................... 8 2
Cash ............................................................... Treasury Stock ........................................ Paid-In Capital from Sale of
Treasury Stock ........................................ Cash ............................................................... Paid-In Capital from Sale of
Treasury Stock .............................................. Treasury Stock ........................................
150,000
97,500
58,000 2,000
150,000 90,000 7,500
July Nov.
60,000
b. $5,500 credit
c. Crystal Springs may have purchased the stock to support the market
price of the stock, to provide shares for resale to employees, or for reissuance to employees as a bonus according to stock purchase agreements. Ex. 12–8
a. 125,000 shares (25,000 × 5) b. $33 per share ($165 ÷ 5)
Ex. 12–9
Assets
Declaring a cash dividend Paying the cash dividend declared in (1)
Authorizing and issuing stock certificates in a stock split Declaring a stock dividend Issuing stock certificates for the stock dividend declared in (4)
0 – 0 0
Stockholders’ Liabilities Equity
+ – 0
0
– 0 0 0
(1) (2) (3) (4) (5)
0 0 0