A publishing company called Lil Tykes, Inc. is preparing its financial statements for its year ending December 31, 2016. They are not certain what the proper accounting treatments are for the following situations, they have asked your group to consult and provide the appropriate accounting treatment.

Provide the journal entry or and an explanation of why an entry should not be made as of December 31, 2016. Provide calculations for the final solution when appropriate.

a)Lil Tykes offers 1-year, 2-year, or 3-year subscriptions to a number of magazines. Payment for subscriptions are collected in advance and credited to the magazine subscriptions collected. The balance of this account was $1,150,000 on December 31, 2016. On December 31, 2016, subscriptions that are outstanding and expire are as follows.

Expire in 2017 $300,000

Expire in 2018 250,000

Expire in 2019 400,000

b)Lil Tykes made the decision on January 2, 2016, to become self-insured and no longer carry collision, fire, and theft coverage on their delivery vehicles. For 2015 the actual losses for delivery expense were $30,000. The premium paid in 2014 for the coverage was $45,000. The controller believes that a self-insurance reserve should be set up by recording a debit of $15,000 to delivery expense and a credit of $15,000 to the self-insurance reserve.

c)On July 1, 2016, an author filed a suit against Lil Tykes for breach of contract, seeking damages of $750,000. Their legal counsel has predicted an unfavorable outcome and estimates that the court may award the plaintiff between $225,000 and $525,000, but it is impossible to determine a more definitive damage amount within that range.

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