EA1. Following is the unadjusted trial balance for Sun Energy Co. on December 31, 2017.

SUN ENERGY CO.

Unadjusted Trial Balance

Year Ended December 31, 2017

Account

Debit

Credit

Cash

$ 5,000

Accounts Receivable

2,000

Merchandise Inventory

4,500

Buildings

2,400

Equipment

3,200

Accounts Payable

$ 5,700

Salaries Payable

2,500

Common Stock

1,500

Dividends

Sales Revenue

13,700

COGS

3,800

Salaries Expense

2,500

Totals

$23,400

$23,400

You are also given the following supplemental information: A pending lawsuit, claiming $2,700 in damages, is considered likely to favor the plaintiff and can be reasonably estimated. Sun Energy Co. believes a customer may win a lawsuit for $3,500 in damages, but the outcome is only reasonably possible to occur. Sun Energy calculated warranty expense estimates of $210.

A. Using the unadjusted trial balance and supplemental information for Sun Energy Co., construct an income statement for the year ended December 31, 2017. Pay particular attention to expenses resulting from contingencies.

B. Construct a balance sheet, for December 31, 2017, from the given unadjusted trial balance, supplemental information, and income statement for Sun Energy Co., paying particular attention to contingent liabilities.

C. Prepare any necessary contingent liability note disclosures for Sun Energy Co. Only give one to three sentences for each contingency note disclosure.

Solution

A.

Sun Energy Co.

Income Statement

Year Ended December 31, 2017

Revenues:

Sales Revenue

Total Revenues

Costs of Goods Sold

Gross Profit

Expenses:

Legal Expense

Warranty Expense

Salaries Expense

Total Expenses

Net Income

B.

Sun Energy Co

Balance Sheet

December 31, 2017

Assets:

Liabilities:

Cash

Accounts Payable

Accounts Receivable

Salaries Payable

Merchandise Inventory

Warranty Liability

Buildings

Legal Liability

Equipment

Equity:

Common Stock

Retained Earnings

Total Assets

Total Liabilities and Equity

C.

Legal Claims:

Warranty: