ACCOUNTING CODIFICATION CASES

Case 2: Recording a forfeited payment

Case 3: Revenue and expense recognition associated with extended warranties

Case 4: Accounting for “due on demand” note payable

Case 8: Capitalization of interest and property taxes on a construction project

Case 2:

Narda Corporation agreed to sell all of its (capital) stock to Effie Corporation for three monthly payments of $200,000.  After Effie made the first required payment, it ceased making other payments.  The stock subscription agreement states that Effie, thus, forfeits its payments and is entitled to no other future consideration.  How should Narda record the $200,000 forfeited payment?

Problem Identification:

1. Do such payments constitute operating income?

2. How should a company account (JOURNALIZE) forfeited stock subscriptions?  

Keyword search:

• Adjustments capital stock
  • Search the term above and then begin skimming the search RESULTS

Hint #1

• What is the Journal Entry needed to record the first installment payment of $200,000?
  • What is the Debit, and what is the Credit?

Hint #2

• What adjustment (journal entry) is NEEDED due to the initial installment payment no longer being a capital stock purchase?

Your accounting knowledge along with what is found/discussed in your research codification will assist you in arriving at a solution.

Case 3:

Lowland Appliance Stores offers customers purchasing its appliances separately priced (extended) warranties. Lowland services these extended warranties.  Its customers can receive no refunds for not using these warranties, and, of course, Lowland must honor these contracts—regardless of any future costs in doing so.  It also “tracks” the profits and losses these types of warranties generate by appliance category—in order to help maintain a competitive price and costing structures.  How should Lowland recognize the revenues of such extended warranties?  

Problem Identification: 

1. How should a company recognize revenues associated with separately priced extended warranties?
   • There is a codification that speaks to this. (See Keyword search below.)

2. Which periods are the expenses recorded?
   • Hint: The codification also speaks to this issue.

Keyword search:

• Separately Priced Extended Warranties

Case 4:

As of January 1, the Lohse Company owes the First Arbor Bank $350,000 which is due on December 31. Since Lohse seems unable to repay the note, the bank agreed that Lohse can “settle” this balance by agreeing to make four, annual installments on each of the next four years, provided that it adds a “due on demand” clause to the note.  Specifically, the lender will “do its best” not to call the note “provided that no adverse significant shift in operations occurs.”  However, First Arbor Bank has the sole discretion to ascertain if these adverse conditions arose, and then to call the note due immediately.  How should Lohse account for this above situation?

Problem Identification:

1. How should a company account for notes payable containing a “due on demand clause” and both a short- and long-term schedule of payments due?
   • Classify the obligation as current, long term, or both?

Keyword Search:

Due on Demand Loan Arrangements

Case 8:

Herb Construction Company is building a hotel for speculative purposes.  That is, the Company has not yet found a buyer for the hotel, but expects to do so within a few months.  Herb, who expects to spend about another two years to complete construction of the hotel, asks his accountant if interest and property taxes associated with this construction site should be capitalized or expensed.   At what rate of interest should Herb use, if any, to capitalize any interest costs?

Problem Identification: 

1. Should property taxes and interest during construction of a hotel be capitalized or expensed?
2. What rate of interest should be used to capitalize any interest costs?

Keyword search:

• Assets for Which Interest Shall Be Capitalized
• Property taxes capitalized
• Capitalization Rate