E13–1
On November 1, 2016, Quantum Technology, a geothermal energy supplier, borrowed $16 million cash to fund a geological survey. The loan was made by Nevada BancCorp under a noncommitted short-term line of credit arrangement. Quantum issued a nine-month, 12% promissory note. Interest was payable at maturity. Quantum’s fiscal period is the calendar year.
Required:

  1. Prepare the journal entry for the issuance of the note by Quantum Technology.
  2. Prepare the appropriate adjusting entry for the note by Quantum on December 31, 2016.
  3. Prepare the journal entry for the payment of the note at maturity.

E13–7
Diversified Semiconductors sells perishable electronic components. Some must be shipped and stored in reusable protective containers. Customers pay a deposit for each container received. The deposit is equal to the container’s cost. They receive a refund when the container is returned. During 2016, deposits collected on containers shipped were $850,000.
Deposits are forfeited if containers are not returned within 18 months. Containers held by customers at January 1, 2016, represented deposits of $530,000. In 2016, $790,000 was refunded and deposits forfeited were $35,000.
Required:

  1. Prepare the appropriate journal entries for the deposits received and returned during 2016.
  2. Determine the liability for refundable deposits to be reported on the December 31, 2016, balance sheet.

E13–15
Cupola Awning Corporation introduced a new line of commercial awnings in 2016 that carry a two-year warranty against manufacturer’s defects. Based on their experience with previous product introductions, warranty costs are expected to approximate 3% of sales. Sales and actual warranty expenditures for the first year of selling the product were:

Required:

  1. Does this situation represent a loss contingency? Why or why not? How should Cupola account for it?
  2. Prepare journal entries that summarize sales of the awnings (assume all credit sales) and any aspects of the warranty that should be recorded during 2016.
    3.What amount should Cupola report as a liability at December 31, 2016?

E13–17
Sound Audio manufactures and sells audio equipment for automobiles. Engineers notified management in December 2016 of a circuit flaw in an amplifier that poses a potential fire hazard. An intense investigation indicated that a product recall is virtually certain, estimated to cost the company $2 million. The fiscal year ends on December 31.
Required:

  1. Should this loss contingency be accrued, only disclosed, or neither? Explain.
  2. What loss, if any, should Sound Audio report in its 2016 income statement?
  3. What liability, if any, should Sound Audio report in its 2016 balance sheet?
  4. Prepare any journal entry needed.

E13–21
The following selected circumstances relate to pending lawsuits for Erismus, Inc. Erismus’s fiscal year ends on December 31. Financial statements are issued in March 2017. Erismus prepares its financial statements according to U.S. GAAP.
Required:
Indicate the amount of asset or liability that Erismus would record, and explain your answer.

  1. Erismus is defending against a lawsuit. Erismus’s management believes the company has a slightly worse than 50/50 chance of eventually prevailing in court, and that if it loses, the judgment will be $1,000,000.
  2. Erismus is defending against a lawsuit. Erismus’s management believes it is probable that the company will lose in court. If it loses, management believes that damages could fall anywhere in the range of $2,000,000 to $4,000,000, with any damage in that range equally likely.
  3. Erismus is defending against a lawsuit. Erismus’s management believes it is probable that the company will lose in court. If it loses, management believes that damages will eventually be $5,000,000, with a present value of $3,500,000.
  4. Erismus is a plaintiff in a lawsuit. Erismus’s management believes it is probable that the company eventually will prevail in court, and that if it prevails, the judgment will be $1,000,000.
  5. Erismus is a plaintiff in a lawsuit. Erismus’s management believes it is virtually certain that the company eventually will prevail in court, and that if it prevails, the judgment will be $500,000.

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