Exercise 13-21Problem 13-6Problem 13-6 (concluded)E13–21 - Disclosures of liabilities ● LO1 through LO6Required:Indicate (by letter) the way each of the items listed below should be reported in a balance sheet at December 31, 2011.Exercise 13-21Item Reporting Method__C_ 1. Commercial paper. N. Not reported__D_ 2. Noncommitted line of credit. C. Current liability__C_ 3. Customer advances. L. Long-term liability __C_ 4. Estimated warranty cost. D. Disclosure note only __C_ 5. Accounts payable. A. Asset__C_ 6. Long-term bonds that will be callable by the creditor in the upcomingyear unless an existing violation is not corrected (there is a reasonablepossibility the violation will be corrected within the grace period).__C_ 7. Note due March 3, 2012.__C_ 8. Interest accrued on note, Dec. 31, 2011.__L_ 9. Short-term bank loan to be paid with proceeds of sale of commonstock.__D_ 10. A determinable gain that is contingent on a future event that appears extremely likely to occur in three months.__C_ 11. Unasserted assessment of back taxes that probably will be asserted, inwhich case there would probably be a loss in six months.__N_ 12. Unasserted assessment of back taxes with a reasonable possibility ofbeing asserted, in which case there would probably be a loss in 13months.__C_ 13. A determinable loss from a past event that is contingent on a futureevent that appears extremely likely to occur in three months.__A_ 14. Bond sinking fund.__C_ 15. Long-term bonds callable by the creditor in the upcoming year thatare not expected to be called.E13–22 - Woodmier Lawn Products - Warranty expense; change in estimate ●LO5 LO6 Woodmier Lawn Products introduced a new line of commercial sprinklers in 2010that carry a one-year warranty against manufacturer’s defects. Because this was thefirst product for which the company offered a warranty, trade publications wereconsulted to determine the experience of others in the industry. Based on thatexperience, warranty costs were expected to approximate 2% of sales. Sales of thesprinklers in 2010 were $2.5 million. Accordingly, the following entries relating tothe contingency for warranty costs were recorded during the first year of selling theproduct:Accrued liability and expenseWarranty expense (2% × $2,500,000) ...........................50,000.................................Estimated warranty liability .............................................................50,000........Actual expenditures (summary entry)Estimated warranty liability ............................................23,000.......................... Cash, wages payable, parts and supplies, etc. ...................................23,000In late 2011, the company’s claims experience was evaluated and it wasdetermined that claims were far more than expected—3% of sales rather than 2%.Required:1. Assuming sales of the sprinklers in 2011 were $3.6 million andwarranty expenditures in 2011 totaled $88,000, prepare any journalentries related to the warranty.2. Assuming sales of the sprinklers were discontinued after 2010, prepareany journal entry(s) in 2011 related to the warranty.Exercise 13-22Requirement 1 Accrued liability and expenseWarranty expense (3% x $3,600,000)................................108,000Estimated warranty liability .............................................. 108,000Actual expenditures (summary entry)Estimated warranty liability .......................................88,000Cash, wages payable, parts and supplies, etc. ................... 88,000Requirement 2 Actual expenditures (summary entry)Estimated warranty liability ($50,000 – $23,000)...................... 27,000Loss on product warranty (3% – 2%] x $2,500,000)................... 25,000Cash, wages payable, parts and supplies, etc. ................... 52,000* *(3% x $2,500,000) – $23,000 = $52,000P 12–1 - Fuzzy Monkey Technologies, Inc. - Securities held- to-maturity; bond investment; effective interest ● LO1Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $80 million of 8% bonds, dated January 1, on January 1, 2011. Management has the positive intent and ability to hold the bonds until maturity. For bonds of similar risk and maturity the market yield was 10%. The price paid for the bonds was $66 million. Interest is received semiannually on June 30 and December 31. Due to changing market conditions, the fair value of the bonds at December 31, 2011, was $70 million.Required:1.Prepare the journal entry to record Fuzzy Monkey’s investment onBJanuaryB 1, 2011. 2.Prepare the journal entry by Fuzzy Monkey to record interest on June 30, 2011 (at the effectiverate). 3.Prepare the journal entries by Fuzzy Monkey to record interest on December 31, 2011 (at the effective rate).4. At what amount will Fuzzy Monkey report its investment in the December 31, 2011, balance sheet? Why?B 5. How would Fuzzy Monkey’s 2011 statement of cash flows be affected by this investment?Problem 12-1Requirement 1 ($ in millions)Investment in bonds (face amount)........................ 80Discount on bond investment (difference)......... 14Cash (price of bonds).......................................... 66Requirement 2 Cash (4% x $80 million).......................................... 3.20Discount on bond investment (difference)............ .10Interest revenue (5% x $66).................................... 3.30Requirement 3 Cash (4% x $80 million).......................................... 3.20Discount on bond investment (difference)............ .11Interest revenue (5% x [$66 + 0.1])........................ 3.31Requirement 4 Fuzzy Monkey reports its investment in the December 31, 2011, balance sheet at its amortized cost – that is, its book value:Investment in bonds............................................................ $80.00Less: Discount on bond investment ($14 –.1 –.11 million) 13 .79 Amortized cost................................................................ $66.21Increases and decreases in the fair value between the time a debt security is acquired and the day it matures to a prearranged maturity value are relativelyunimportant if sale before maturity isn’t an alternative. For this reason, if aninvestor has the “positive intent and ability” to hold the securities to maturity, investments in debt securities are classified as “held-to-maturity” and reported at amortized cost rather than fair value in the