-Short-term obligations can be reported as long-term liabilities if: -Gain contingencies usually...

Question:

-Short-term obligations can be reported as long-term liabilities if:

-Gain contingencies usually are recognized in a company's income statement when:

-Funzy Cereal includes one coupon in each package of Wheatos that its sells and offers a toy car in exchange for $1.00 and three coupons. The cars cost Funzy $1.50 each. Experience indicates that 40% of the coupons eventually will be redeemed. During the last month of 2013, the first month of the offer, Funzy sold 12 million boxes of Wheatos and 2.4 million of the coupons were redeemed. What amount should Funzy report as a promotional expense for coupons on its December 31, 2013, income statement?

- Bencorp issues a $90,000, 6-month, non interest bearing note that the bank has discounted at a 10% discount rate.

1. Prepare the appropriate journal entry to record the issuance of the note.

2. Determine the effective interest rate.

Liabilities:

Liabilities are the amount that a company owes to its suppliers and creditors. It can be either for short-term or long terms. If it is for short term i.e. for less than 1 year period, then it is called short term liabilities and if it is fo long term i.e. for more than 1 year time, then it is called long term liabilities.

Answer and Explanation:

  • When the gain contingencies are realized in actual, then only it is recorded otherwise it is not recorded. It is expressed in the conservatism principle of accounting.
  • Actual promotional expenses = (1.50 - 1) = $0.5

So, the promotional expenses for the three coupons are $0.5.

Total coupon redemption = $2,400,000.

Total toys car given = (2,400,000 /3) = 800,000 car toys

Therefore the promotional expenses for 800,000 car toys is (800,000 x .50) = $400,000

  • 1.

Journal Entry:

Cash a/c Dr $81,000

Discount expenses a/c Dr $9,000

To, Notes a/c $90,000

2. Effective Interest rate = 0.909


Learn more about this topic:

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Current & Long-Term Liabilities: Definition & Characteristics

from Accounting 101: Financial Accounting

Chapter 10 / Lesson 1
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