The following information is not included in the above balance sheet. Please exp
ID: 2339110 • Letter: T
Question
The following information is not included in the above balance sheet. Please explain treatment of the information and how it would be shown on the revised balance sheet.
a. Walbash has discovered that a product it began manufacturing and selling in 2016
has defective bearings, sometimes causing a wheel to fall off. Walbash has issued
a “recall” notice in newspapers and magazines in which it offers to replace the
bearings. It estimates the cost of $200,000 for these repairs. No lawsuits have
been filed for injury claims, although the company feels that there is a reasonable
possibility that claims may total as high as $2 million.
b.Walbash sold 1000 software packages for $300 each on credit (ignore cost of
goods sold). With each software package, Walbash offered a premium in the form
of a USB drive for the return of one proof of purchase. The offer expires June 30,
2017. The cost of each USB drive is $5 and Walbash estimates that 80% of the
premiums will be redeemed. In 2016, 540 premiums were redeemed.
Walbash Company Balance Sheet December 31,2016 Liabilities Current Liabilities sets t Assets S 3,800 Accounts Payable 19,400 4.100 7,200 4,000 Receivable 18,500 Accrued Wages Income Tax Payable Mortgage Payable Less: Allow ance for Doubtful Accounts nventory Sale Securities 17,800 30,500 4,800 Long Term Liabilities Mortgage Payable 16,000 40,000 Dray Company Bonds 9,000 Bonds Payable Property, Plant & Equipment Building Less: Accumulated Depreciation Equipment Less: Accumulated Depreciation Total Liabilities 90,700 83,400 21,000 29,600 13,000 42,400 18,00 Stakeholders Equity 12,000 Common Stock S 11,000 Additional Paid in Capital - Common Preferred Stock Additional Paid in Capital - Preferrec Retained Earnings Premium on Bond Payable Security for Sale Less: Treasury Stock 14,700 S 25,700 Intangible Assets Patent Less: Amortization Tredemarks 8,000 2,400 8,200 2300 8,400 37,800 5,900 3,700 4,300 1,100 1,800 Other Assets Prepaid Insurance Sinking Fund 3,600 4 2,900 7,000 10,000 Notes Recaivable Total Assets S 166 200 Total Liabilities & Stakeholders Equity S 168,200 Contingent Liability SPA Fine (b.) 50,000Explanation / Answer
a The company has issued Recall notice in the newspaper to replace the bearings. The estimated cost of replacement would be $200000. As this cost is highly probable to be incurred by the company, and the amount is an estimation, the company must create a provision in books for the estimated cost of repairs. The journal entry for the same would be: Replacement of Bearings expenses $200000 Provision for replacelemt of Bearings expenses $200000 Being provision created for replacement of bearings As a result of this entry, Provision of $ 200000 is recorded under Current liabilities. Retained earnings will reduce by $ 200000 due to expense being recorded. For the estimated expenditure if any lawsuit is filed for injury, the company estimates an the amount of claims to be $ 2 million. As no suit has been filed till now, the company can record it as a contingent liability on the face of Balance sheet and disclose the details in notes b For recording the sale, the following journal entry is recorded: Accounts Receivable $300000 Sales $300000 Being 1000 units sold at $300 each on credit For awarding of USB drive: Purchases $4000 Bank $4000 Being USB drives purchased against an estimate that 80% premium of sale of 1000 units will be redeemed For awarding the premium to Debtors, Business Promotion Expenses $2700 Accounts Receivable $2700 Being premiums provided to 540 claims The remaining expense for 240 claims (800-540) can be recorded as and when occurred. As a result of the above entries, the revenue in Income statement will increase by $300000, the expenses will be increased by $ 6700, Accounts receivable in Balance Sheet by $297300 and Bank will reduce by $4000
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