SOLUTIONS – WEEK FIVE – ACCT 305

Exercise 13-9
Requirement 1 

Cash....................................................................... 7,500
Liability – customer advance ............................ 7,500

Requirement 2 

Cash....................................................................... 25,500
Liability – refundable deposits ......................... 25,500

Requirement 3 

Accounts receivable............................................... 856,000
Sales revenue .................................................... 800,000
Sales taxes payable ([5% + 2%] x $800,000).... 56,000

Brief Exercise 13-5

Cash (difference)....................................................... 9,550,000
Discount on notes payable ($10,000,000 x 6% x 9/12) 450,000
......................................Notes payable (face amount) 10,000,000

Effective interest rate:
Discount ($10,000,000 x 6% x 9/12) $     450,000
Cash proceeds  ÷ $9
   ,550,000
   
Interest rate for 9 months  4.712%
x    12/9 
___________
Annual effective rate 6.3%
Brief Exercise 13-8
This is a loss contingency and the estimated warranty liability is credited and warranty 
expense is debited in the period in which the products under warranty are sold.   Right 
will report a liability of $130,000:

Warranty Liability
_____________________________________________

150,000 Warranty expense (1% x $15,000,000)

Actual expenditures20,000

130,000 Balance
Communication Case 13­8
Memorandum:

To: Mitch Riley

From: Your Name
Re: Accounting for contingencies
Below is a brief overview of my initial thoughts on how Western should
account for the four contingencies in question.
1. The labor disputes constitute a loss contingency. Though a loss is
probable, the amount of loss is not reasonably estimable. A disclosure note
is appropriate:
 _______________________________
Note X: Contingency
During 2006, the Company experienced labor disputes at three of its
plants. The Company hopes an agreement will soon be reached.
However negotiations between the Company and the unions have
not produced an acceptable settlement and, as a result, strikes are
ongoing at these facilities.

2. The A. J. Conner matter is a gain contingency.  Gain contingencies are not accrued even if 
the gain is probable and reasonably estimable.   The gain should be recognized only when 
realized.  

Though gain contingencies are not recorded in the accounts, they should be disclosed in 
notes to the financial statements.  

_______________________________
Note X: Contingency
In accordance with a 2004 contractual agreement with A.J. Conner
Company, the Company is entitled to $37 million for certain fees
and expense reimbursements. The bankruptcy court has ordered
A.J. Conner to pay the Company $23 million immediately upon
consummation of a proposed merger with Garner Holding Group.
 Case 13­8 (concluded)

3. The contingency for warranties should be accrued:

Warranty expense ([2% x $2,100 million] – $1 million) 41,000,000
Estimated warranty liability  41,000,000

The liability at December 31, 2006, is reported as $41 million.

4. The Crump Holdings lawsuit is a loss contingency.  Even though the lawsuit occurred in 
2007, the cause for the action occurred in 2006.  Only a disclosure note is needed because 
an unfavorable outcome is reasonably possible, but not probable.  Also, the amount is not 
reasonably estimable.

_______________________________
Note X: Contingency
Crump Holdings filed suit in January 2007 against the Company
seeking $88 million, as an adjustment to the purchase price in
connection with the Company's sale of its textile business in 2006.
Crump alleges that the Company misstated the assets and liabilities
used to calculate the purchase price for the division. The Company
has answered the complaint and intends to vigorously defend the
lawsuit. Management believes that the final resolution of the case
will not have a material adverse effect on the Company's financial
position.

We can discuss these further in our meeting later today.