Accounting 350 – Homework #4

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Question 1: Purchase Commitments

On September 5, 2011, Maloney Corporation signed a purchase commitment to purchase inventory for $180,000 on or before March 31, 2012. The company's fiscal year-end is December 31. The contract was exercised on March 4, 2012 and the inventory was purchased for cash at the contract price. On the purchase date of March 4, the market price of the inventory was $182,000. The market price of the inventory on December 31, 2011, was $168,000.

a. Prepare the necessary adjusting journal entry (if any is required) on December 31, 2011.

b. Prepare the journal to record the purchase on March 4, 2012. Question 2: Contingencies

Nice Company files a lawsuit against Cheater Corp. for $4,000,000 in December 2010 alleging patent infringement. Cheater Corp.'s manager thinks it is probable that Cheater Corp. will eventually have to pay something to settle the suit, and the best estimate of the expected amount ranges from $1,200,000 to $2,400,000.

In your answers below, you may ignore income taxes

a. Show any related journal entries Cheater Corp. will record in 2010.

b. Assume that the managers of Nice Company have information indicating that it is highly probable that Nice will win the lawsuit and they expect to collect the entire $4,000,000. Show any related journal entries Nice Company will record in 2010.

c. Assume that the lawsuit is settled in 2011 and Cheater Corp. pays Nice Company $2,300,000 in cash. Calculate the effect this company will have on the 2011 net income for each company.

Question 3: Short-term liabilities

Kendall Products began operations in 2013. Kendall's fiscal year ends on December 31. Kendall issued its 2013 financial statements on February 15, 2014.

2013 Activity
a. On