Question

  The following obligations apply to a particular company. Which of them should be valued in the company’s accounting records and how would you go about valuing them?

    a. The company’s promise to deliver 10 units of instrument A by the 15th of next month to customer M

    b. As part of the contract described in a, the company agrees to pay customer M a $1,000 penalty for every day the delivery is late

    c. A two-year employment contract with a well-respected scientist

    d. The employees’ expectation that they will receive a handsome end-of-year bonus

    e. The five-year lease on the company’s premises, where 4.5 years of the lease term remain and the lease calls for monthly payments of $20,000

    f. A contract with a major supplier that requires the company to accept delivery of and pay for 14,000 metric tons of material over the next year, where the fixed price on the contract being 20 percent below the price the company would now have to pay to other suppliers for equivalent material.

    g. A three-year contract with a consulting firm to assist in improving scheduling in all of the company’s plants

    h. Warranty provisions on a recently introduced product, where recent evidence suggests that about 25 percent of all units supplied to customers since the product introduction will require warranty repair

    i. The company’s promise to customer N to rebate $2,000 if the customer is not fully satisfied with the quality of the products

Answer 1

A) ONLY PROMISE TO DELIVER INSTRUMENT TO CUSTOMER M DOES NOT QUALIFIES TO RECORD IT IN THE BOOKS OF ACCOUNTS AS IT CONTAINES NO VALUE.

B) PENALTY TO BE PAID TO CUSTOMER M OF $1000 FOR EVERY DELAY. THIS AMOUNT IS TO TREATED AS EXPENSE IN BOOKS OF ACCOUNTS.

JOURNAL ENTRY TO BE MADE FOR THE SAME SHOULD BE

PENALITIES   DR.

   TO CASH

C) THIS IS JUST A MERE CONTRACT. THERE IS NO VALUE INVOLVED IN IT SO IT CAN NOT BE RECORDED IN ACCOUNTS.

D) EMPLOYEES EXPECTATION FOR BONUS CAN NOT BE RECORDED IN ACCOUNTS.

E) THE FIVE YEAR LEASE CONTRACT NEEDS TO BE ACCOUNTED. MONTHY PAYMENT TO LEASE RENTALS NEEDS TO BE ACCOUNTED FOR IN BOOKS. JOURNAL ENTRY FOR THE SAME IS:

LEASE RENTAILS               DR.

TO CASH/BANK

F) THE TRANSACTION NEEDS TO BE ACCOUNTED IN THE BOOKS FOR THE 20% AMOUNT.

G) THE THREE YEAR CONSULTING CONTRACT NEEDS TO ACCOUNT FOR. WHEN THE CONSULTING FIRM WILL RAISE BIIL FOR SERVICE IT HAS RENDERED THEN THAT AMOUNT NEED TO BE ACCOUNTED IN BOOKS.

H) THIS PROVISION NEEDS TO BE ACCOUNTED IN BOOKS. 25% OF THE AMOUNT SUPPLIED NEEDS TO BE PROVIDED IN PROFIT AND LOSS ACCOUNT.

PROFIT & LOSS

PROVISION FOR WARRANTY

I) THIS AMOUNT NEEDS TO BE ACCOUNT FOR WHEN CUSTOMER WANTS THE DISCOUNT. OTHERWISE NO NEED.