Required:

Prepare journal entries for the above transactions.

Answer:

(1.)	1/15/06
	Cash	7,000
	Liability for customer advance		7,000
(2.)	2/3/06
	Cash	6,700
	Liability for refundable deposits		6,700
(3.)	2/6/06
	Cash	59,000
	Liability for customer advance	7,000
	Sales revenue		66,000
(4.)	3/31/06
	Accounts receivable	742,000
	Sales revenue		700,000
	Sales taxes payable		42,000
	[(4% + 2%) x $700,000]

Learning Objective: 3 Level of Learning: 3

116. Mozart Music Co. began operations in December of 2006. The company sold gift certificates during December in various amounts totaling $1,600. The gift certificates are redeemable for merchandise within 3 years of the purchase date. However, experience within the industry predicts that 90% of gift certificates will be redeemed within one year. Certificates totaling $500 were presented for redemption during 2006 as part of merchandise purchases having a total retail price of $750.

Required:

1. Determine the liability for gift certificates to be reported on the December 31, 2006, balance sheet.

2. What is the appropriate classification (current or noncurrent) of the liabilities at December 31, 2006? Show calculations.

Answer:

Requirement 1:
Gift certificates sold	$1,600
Gift certificates redeemed	(500	)
Liability to be reported at December 31	$1,100
Requirement 2:
The liability for gift certificates is part current and part noncurrent:
Gift certificates sold	$1,600
	x 90%
Estimated current liability	1,440
Gift certificates redeemed	(500	)
Current liability at December 31	940
Noncurrent liability at December 31 ($1,600 x 10%)	160
Total	$1,100

Learning Objective: 4 Level of Learning: 3

117. The following selected transactions relate to contingencies of Eastern Products Inc. which began operations in July, 2006. Eastern's fiscal year ends on December 31. Financial statements are published in April 2004.

1. No customer accounts have been shown to be uncollectible as yet, but Eastern estimates that 3% of credit sales will eventually prove uncollectible. Sales were $300 million (all credit) for 2006.

2. Eastern offers a one-year warranty against manufacturer's defects for all its products. Industry experience indicates that warranty costs will approximate 2% of sales. Actual warranty expenditures were $3.5 million in 2006 and were recorded as warranty expense when incurred.

3. In December, 2006, Eastern became aware of an engineering flaw in a product that poses a potential risk of injury. As a result, a product recall appears inevitable. This move would likely cost the company $1.5 million.

4. In November, 2006, the State of Vermont filed suit against Eastern, asking civil penalties and injunctive relief for violations of clean water laws. Eastern reached a settlement with state authorities to pay $4.2 million in penalties on February 3, 2007.

5. Eastern is the plaintiff in a $40 million lawsuit filed against a customer for costs and lost profits from contracts rejected in 2006. The lawsuit is in final appeal and attorneys advise that it is virtually certain that Eastern will be awarded $30 million.