Current liabilities Flashcards
(2 cards)
Herr Inc. has a fiscal year ending April 30. On May 1, of the previous year, Herr borrowed $10,000,000 at 15% to finance construction of its own building. Repayments of the loan are to commence the month following completion of the building. During the current year ended April 30, expenditures for the partially completed structure totaled $6,000,000. These expenditures were incurred evenly throughout the year. Interest earned on the unexpended portion of the loan amounted to $400,000 for the year. How much should be shown as capitalized interest on Herr’s financial statements at April 30?
$450,000
Weight avg exp. (6m/2) = 3M x .15 = 450,000
The amount of interest to be capitalized is determined by applying an interest rate to the average amount of accumulated expenditures for the asset during the period. The interest rate to be used is the rate on new borrowings which are specifically associated with the acquisition of the new asset, or a weighted average of the interest rates on all debt outstanding during the period. The amount of interest thus determined is not reduced or in any way offset by interest income earned during the construction period.
Baker Co. sells consumer products that are packaged in boxes. Baker offered an unbreakable glass in exchange for two box tops and $1 as a promotion during the current year. The cost of the glass was $2.00. Baker estimated at the end of the year that it would be probable that 50% of the box tops will be redeemed. Baker sold 100,000 boxes of the product during the current year and 40,000 box tops were redeemed during the year for the glasses. What amount should Baker accrue as an estimated liability at the end of the current year, related to the redemption of box tops?
$5,000
In order to increase sales and promote certain products, companies may offer premiums to those customers who return box tops, coupons, labels, wrappers, etc., as proof of purchase. The cost of these premiums represents an expense that should be matched against revenue from the sales benefited. At the end of the accounting period, an expense account should be debited and a liability account credited for the cost of outstanding premiums expected to be redeemed in subsequent periods. There were 50,000 box tops expected to be redeemed (100,000 sold x 50% probable redemption). As 40,000 box tops were redeemed during the year, an estimated 10,000 box tops will be redeemed in the future. The premium required two box tops and $1 per redemption. An estimated 10,000 box tops equates to an estimated 5,000 unbreakable glasses (10,000 / 2). The glasses cost $2 each, or $10,000 total ($2 x 5,000). The company also estimated receiving $5,000 ($1 x 5,000) in the redemption. The estimated liability at the end of the current year related to the premium is $5,000 ($10,000 glasses cost - $5,000 received with box tops).
