Reference no: EM13872204
Purpose: This exercise will enable you to practice analyzing situations to determine whether a liability should be reported, and if so, at what amount.
Clare Avery Inc., a publishing company, is preparing its December 31, 2014 financial statements and must determine the proper accounting treatment for each of the following situations:
1. Avery sells subscriptions to several magazines for a two- or three-year period. Cash receipts from subscribers are credited to Unearned Subscription Revenue. This account had a balance of $5,300,000 at December 31, 2014, before adjustment. An analysis of outstanding subscriptions at December 31, 2014 shows that they expire as follows:
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During 2015:
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$ 800,000
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During 2016:
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900,000
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During 2017:
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1,200,000
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2. A suit for breach of contract seeking damages of $1,000,000 was filed by an author against Avery on June 1, 2014. The company's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the court's award to the plaintiff is in the range between $200,000 and $800,000. The company's legal counsel believes the best estimate of potential damages is $350,000.
3. On January 2, 2014, Avery discontinued collision, fire, and theft coverage on its delivery vehicles and became self-insured for these risks. Actual losses of $40,000 during 2014 were charged to Delivery Expense. The 2013 premium for the discontinued coverage amounted to $75,000, and the controller wants to set up a reserve for self-insurance by a debit to Delivery Expense of $35,000 and a credit to Liability for Self-insurance of $35,000.
4. During December 2014, a competitor company filed suit against Avery for copyright infringement claiming $600,000 in damages. In the opinion of management and company counsel, it is reasonably possible that damages will be awarded to the plaintiff. The best estimate of potential damages is $175,000.
Instructions
For each of the situations above, prepare the journal entry that should be recorded as of December 31, 2014, or explain why an entry should not be recorded. Show supporting computations in good form.
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