Listed below are selected transactions of Baileys’ Department Store for the current year ending December 31. 1. On December 5, the store received $500 from the Jackson Players as a deposit to be returned after certain furniture to be used in stage production was returned on January 15. 2. During December, cash sales totaled $798,000, which includes the 5% sales tax that must be remitted to the state by the fifteenth day of the following month. 3. On December 10, the store purchased for cash three delivery trucks for $120,000. The trucks were purchased in a state that applies a 5% sales tax. 4. The store determined it will cost $100,000 to restore the area (considered a land improvement) surrounding one of its store parking lots, when the store is closed in 2 years. Baileys’ estimates the fair value of the obligation at December 31 is $84,000. 5. As a result of uninsured accidents during the year, personal injury suits for $350,000 and $60,000 have been filed against the company. It is the judgment of Baileys’ legal counsel that an unfavorable outcome is unlikely in the $60,000 case but that an unfavorable verdict approximating $250,000 (reliably estimated) will probably result in the $350,000 case. 6. Baileys’ Midwest store division consisting of 12 stores in “Tornado Alley” is uninsurable because of the special risk of injury to customers, employees, and losses due to severe weather and subpar construction standards in older malls. The year 2020 is considered one of the safest (luckiest) in the division’s history because no loss due to injury or casualty was suffered. Having suffered an average of three casualties a year during the rest of the past decade (ranging from $60,000 to $700,000), management is certain that next year the company will probably not be so fortunate. Instructions a. Prepare all the journal entries necessary to record the transactions noted above as they occurred and any adjusting journal entries relative to the transactions that would be required to present fair financial statements at December 31. Date each entry. For simplicity, assume that adjusting entries are recorded only once a year on December 31. b. For items 5 and 6, indicate what should be reported relative to each situation in the financial statements and accompanying notes. Explain why.
Listed below are selected transactions of Baileys’ Department Store for the current year ending December 31.
1. On December 5, the store received $500 from the Jackson Players as a deposit to be returned after certain furniture to be used in stage production was returned on January 15.
2. During December, cash sales totaled $798,000, which includes the 5% sales tax that must be remitted to the state by the fifteenth day of the following month.
3. On December 10, the store purchased for cash three delivery trucks for $120,000. The trucks were purchased in a state that applies a 5% sales tax.
4. The store determined it will cost $100,000 to restore the area (considered a land improvement) surrounding one of its store parking lots, when the store is closed in 2 years. Baileys’ estimates the fair value of the obligation at December 31 is $84,000.
5. As a result of uninsured accidents during the year, personal injury suits for $350,000 and $60,000 have been filed against the company. It is the judgment of Baileys’ legal counsel that an unfavorable outcome is unlikely in the $60,000 case but that an unfavorable verdict approximating $250,000 (reliably estimated) will probably result in the $350,000 case.
6. Baileys’ Midwest store division consisting of 12 stores in “Tornado Alley” is uninsurable because of the special risk of injury to customers, employees, and losses due to severe weather and subpar construction standards in older malls. The year 2020 is considered one of the safest (luckiest) in the division’s history because no loss due to injury or casualty was suffered. Having suffered an average of three casualties a year during the rest of the past decade (ranging from $60,000 to $700,000), management is certain that next year the company will probably not be so fortunate.
Instructions
a. Prepare all the
b. For items 5 and 6, indicate what should be reported relative to each situation in the financial statements and accompanying notes. Explain why.
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