Question

Analyzing and Determining Liability Amounts
For each of the following situations, indicate the liability amount, if any, that is reported on the balance sheet of Bloomington Inc. at December 31, 2016.

Next to each situation, enter the liability amount reported on Bloomington's balance sheet. If the amount is not reported as a liability, enter zero as your answer.

a. Bloomington owes $250,000 at year-end 2016 for inventory purchase. $____
b. Bloomington agreed to purchase a $31,000 drill press in January 2017. $____
c. During November and December of 2016, Bloomington sold products to a customer and warranted them against product failure for 90 days. Estimated costs of honoring this 90-day warranty during 2017 are $6,100. $____
d. Bloomington provides a profit-sharing bonus for its executive equal to 5% of reported pretax annual income. The estimated pretax income for 2016 is $950,000. Bonuses are not paid until January of the following year. $____

Answer 1

Answer:

a) $250,000

b) Zero

c) $6,100

d) $47,500

Explanation:

a) Bloomington owes $250,000 at year-end 2016 for inventory purchase.\

This relates to account payable and the amount to be reported as liability as at year-end 2016 is $250,000.

b)Bloomington agreed to purchase a $31,000 drill press in January 2017.

No liability will be recognized at year-end because the entity has no present obligation as there is no legal or constructive responsibility to pay $31,000. What occurred is just an agreement that can be altered.

c) During November and December of 2016, Bloomington sold products to a customer and warranted them against product failure for 90 days. Estimated costs of honoring this 90-day warranty during 2017 are $6,100.

The entity will recognized $6,100 as warranty payable as the entity has a present obligation as at year-end 2016 to compensate the customer.

d)Bloomington provides a profit-sharing bonus for its executive equal to 5% of reported pretax annual income. The estimated pretax income for 2016 is $950,000. Bonuses are not paid until January of the following year

The entity will report 5% of $950,000 ($47,500) as liability at year-end 2016 as the the entity has a present obligation to settle its executive.