Ramirez Inc., a publishing company, is preparing its December 31, 2017 financial statements and must determine the proper accounting treatment for the following situations. Ramirez has retained your firm to help with this task.
1. Ramirez sells subscriptions to several magazines for a one-year, two-year, or three-year period. Cash receipts from subscribers are credited to Unearned Subscriptions Revenue, and this account had a balance of $2.3 million at December 31, 2017. Outstanding subscriptions at December 31, 2017, expire as follows:
During 2018 ........................... $600,000
During 2019 ............................ 500,000
During 2020 ............................ 800,000
2. On January 2, 2017, Ramirez discontinued collision, fire, and theft coverage on its delivery vehicles and became self-insured for these risks. Actual losses of $50,000 during 2017 were charged to Delivery Expense. The 2016 premium for the discontinued coverage amounted to $80,000 and the controller wants to accrue a reserve for self-insurance by a debit to Delivery Expense of $30,000 and a credit to the Reserve for Self-Insurance of $30,000.
3. A suit for breach of contract seeking damages of $1 million was filed by an author against Ramirez on July 1, 2017. Ramirez's legal counsel believes that an unfavourable outcome is likely. A reasonable estimate of the court's award to the plaintiff is between $300,000 and $700,000. No amount within this range is a better estimate of potential damages than any other amount.
4. Ramirez's main supplier, Bartlett Ltd., has been experiencing liquidity problems over the last three quarters. In order for Bartlett's bank to continue to extend credit, Bartlett has asked and Ramirez has guaranteed its indebtedness. The bank loan stands at $500,000 at December 31, 2017, but the guarantee extends to the full credit facility of $900,000. There is currently no indication that Bartlett will default on any of its bank loans.
5. Ramirez's landlord has informed the company that its warehouse lease will not be renewed when it expires in six months. Ramirez entered into a $2-million contract on December 15, 2017 with Complete Construction Company Ltd., committing Ramirez to building an office and warehouse facility.
6. During December 2017, a competitor company filed suit against Ramirez for industrial espionage, claiming $1.5 million in damages. In the opinion of management and company counsel, it is reasonably possible that damages will be awarded to the plaintiff. However, the amount of potential damages awarded to the plaintiff cannot be reasonably estimated.
Instructions
(a) For each of the above situations, provide the journal entry that should be recorded as at December 31, 2017 under ASPE, or explain why an entry should not be recorded. For each situation, identify what disclosures are required, if any.
(b) Would your answer to any of the above situations change if Ramirez followed current IFRS standards?
(c) You are a potential investor. Do you view Ramirez's decision for self-insurance as negligent on the part of the board of directors? Why or why not?